Relieve 401(k) Blues with a Little Help

Physician's Money Digest, March31 2003, Volume 10, Issue 6

Many physician-investorsapproaching retirementhave had to revise theirtimetables in light of the market'spoor performance over the past 3years. While forced adjustments areboth unwanted and unwelcome,there is some good news. Severalfinancial services and mutual fundcompanies are introducing programsthat enable individuals to delegateactive management of their 401(k)sto the financial professionals who runtheir retirement accounts.

THE PRICE FOR ADVICE

AIG (877-638-4244; www.aig.com) is one of the first companiesstepping into the fray. For a fee of upto 1.25% of your 401(k)'s accountvalue, AIG will tailor your portfolio,taking into account factors such asage, risk tolerance, and retirementgoals, and will rebalancethe portfolio each quarter.

Companies are now ableto offer this service becauseof a ruling by the US LaborDepartment in December2001. This ruling removedthe conflict-of-interest regulationsthat previously prohibited401(k) providers fromdirectly advising their investors. Companiesmust, however, hire independentfirms to handle the calculationsfor portfolio recommendations. AIG,for example, has hired Ibbotson Associates(312-616-1620; www.ibbotson.com), a Chicago-based consultingfirm, for the job.

Merrill Lynch (877-652-4928;www.ml.com) is offering a similarservice, and is also relying on calculationsby Ibbotson. Citigroup (800-221-3636; www.citigroup.com), in ajoint venture with State Street ofBoston (877-773-8637) called Citi-Street (www.citistreetonline.com), beganoffering the service last July, anduses calculations by Financial Engines(650-565-4900;www.financialengines.com) for making investment recommendations.CitiStreet's annual feesrange from 0.01% to 0.75% of anindividual's 401(k) account balance.

The opportunity to have their401(k) accounts actively managed iswelcome news for many investors.According to a recent survey byHewitt Associates, more than 80% of401(k) participants made no investmentallocation changes during 2001.Despite a number of companiesoffering their employees access toonline financial planning programs,investors didn't take advantage ofthese programs because they didn'tfeel comfortable making 401(k) decisionson their own.

UNDER THE MICROSCOPE

For employees at the HolstonMedical Group of Kingsport, Tenn,participation in AIG's new activelymanaged 401(k) program is optional.Employees can continue to make theirown investment choices, or they canelect to have Ibbotson manage theirportfolio. Investors can also choose tosupply additional details, such asinformation about estate planning,college financing, and other specificfinancial goals. The data can be suppliedonline, by phone, or in person.

Using Ibbotson's financial software,AIG will select a blend of stockand bond mutual funds for an individual'sportfolio. Ibbotson'scomputer programs will rebalancethe account eachquarter, ensuring that itmatches the allocation model.For example, in the AIGplan, a portfolio for a 45-yearoldwoman who has a 401(k)balance of $80,000 and earns$60,000 annually would allocate60% of account assets tostock mutual funds and 40% tobonds. The bond proportion wouldrise as the woman ages.

Merrill Lynch indicates that itsprogram will feature similar choices.CitiStreet's program requires moreextensive personal information beforethe company will create a mutualfund portfolio. Other financial servicescompanies are slowly inchingtheir way toward actively managing401(k) accounts, particularly in lightof recent legislative activity.

In 2002, US Representative JohnBoehner (R-Ohio) sponsored a billthat would allow employers and401(k) providers to offer advice toemployees without having to hire outsidefirms to create investment models.The legislation would shift thefiduciary responsibility for providinginvestment advice from employers tothe financial services companies. It isexpected that the bill, which passedthe US House but stalled in the USSenate, will be reintroduced this year.

Regardless of the pending legislation'soutcome, the opportunity tosave for retirement and receive investmentadvice is good news for themany individuals who are relyingeven more on 401(k)-type plans fortheir retirement.