Advisor Blog

A recent New York Times article by Tara Siegel Barnard titled "Why Panic? A couple's Nest Egg Better Left Alone" discusses the experience of a typical retired couple during the market plunge of 2008-2009.  It makes a number of good points and it is particularly interesting to us because the retired couple in the article are the parents of a long-time friend and colleague at DFA, Mark Gochnour.  Mark was the guy who happened to answer the phone when I first called DFA a dozen or so years ago. 

Among other things, the article discusses the importance of disciplined savings, choosing a portfolio with characteristics that fit within your risk tolerance, and being able to draw income from stable high-quality bond funds during periods of stock market stress.  At a conference a couple of weeks ago, I got to see how some planners have referred to this as the portfolio's "liquidity ratio", to borrow a term from balance sheet analysis.  Essentially, this is how many years of expenses can be covered without selling equity positions in the portfolio.  For retirees that choose to work with us for financial planning/wealth management, this is typically many years - more than enough time for the stock market to recover from even a serious decline. 

“It is really the simple things that I call the blocking and tackling of investing,” Mr. Gochnour said. “And you have to stay disciplined and stick with your plan, not only in good times but in more challenging times as well."  As the author points out, it also helps to turn off the television.

Many business owners and 401(k) plan sponsors are scrambling to understand and comply with the new Department of Labor mandated fee disclosure regulations that will become effective only a few months from now. The new regulations explained under sections 408(b)(2) and 404(a) of the Employee Retirement Income Security Act of 1974 (ERISA) require additional disclosures to be made to plan sponsors and plan participants, and require all plan service providers to furnish much more information about their services, expenses and fees. ERISA section 408(b)(2), the service provider rules, become effective April 1, 2012, while the new 404(a) participant disclosure rules become effective May 31, 2012.

Employer sponsored retirement plans, including 401(k) plans, are governed by the Employee Retirement Income Security Act of 1974, commonly known as ERISA.  Both ERISA and the Internal Revenue Code generally prohibit investment advisors from providing personalized advice to 401(k) participants if the advisor receives compensation from the investment vehicles that they recommend.  This protects participants from conflicts of interest - specifically, from the advisor's incentive to recommend more expensive products that may increase the advisor's compensation.

So, if you're a participant in a typical 401(k) plan - one that's sold by a broker or an insurance company - chances are that you can't get individualized advice from the "advisor" who sold your company the plan.  There are some new exceptions to this rule under the Pension Protection Act of 2006, but the advice is subject to safeguards and provisions preventing the slanting of advice by advisors for their own financial benefit.  Essentially, this means providing advice based on a certified computer model or on a "level fee" basis, which must be supported by an annual audit.

There is a better way.  A fee-only Registered Investment Advisor is compensated directly and solely by the retirement plan and has none of these conflicts of interest.  Thus, a fee-only RIA, like Talis Advisors, can provide individualized investment advice to 401(k) plan participants without any restrictions.