Help! I'm Scared For My 401(K)

At the end of the day, what would really help employees manage their 401(k)s? Good investment advice, that's what. Your company may distribute an educational booklet that shows pretty pie charts and defines words like "diversification." But after all the reading is done--after you decide whether you're a conservative, moderate or aggressive investor--two questions remain: How should you invest your money and should you own company stock?

Post-Enron, a laser beam has been turned on America's investing skills. What we see isn't pretty. By now the public has read a ton of stories about diversification, yet most people still don't get it. Even if you own mutual funds, you aren't diversified if they focus on a single industry (remember when we were all tech, all the time?).

Most corporations think that your 401(k) is entirely your problem. If you make mistakes--well, better luck in the next life. But this life is not a dress rehearsal. Most top executives get company-paid advice to help them manage their multimillions. Why shouldn't the grunts with just 401(k)s get a few suggestions, too?

At some companies, they do. These include such well-known names as Merck, Xerox, 3M, Hewlett-Packard, Continental Airlines, Mattel and H&R Block. But plenty of CEOs won't even consider offering advice because they're afraid you'll sue them if it doesn't work out. Congress could end that worry by making just one little change in the pension law. But when lawmakers tinker, trouble starts. They're going for bigger changes that help the industry, not you.

I'll get to that in a moment. First let me tell you about the galloping movement by good guys to offer 401(k) advice. Three online advisory firms dominate this business today: Financial Engines in Palo Alto, Calif., offered directly by 600 employee plans; mPower in San Francisco, with 250 plans, and Morningstar's ClearFuture in Chicago, with 400 plans. All three serve many other corporate and public-sector plans through financial institutions such as the Vanguard Group (Financial Engines) and T. Rowe Price (ClearFuture).

Computerized online advisers work roughly--very roughly--the same way. Employees log on to the Web site, supply some personal and financial information, then enter the income they're aiming for when they retire. The program advises them on which specific funds in their 401(k) will serve them best.

Markets, of course, never work out the way we think. Financial Engines was the first to explain this kind of risk to investors. Its program looks at your savings rate, your investments and the years you have left to work. Then it calculates your odds of retiring with the income you want. You might be startled to learn that your plan has only a 40 percent chance of success--or, baldly, a 60 percent chance of falling short. To reduce that risk, you'd have to save more and invest it less aggressively. Alternatively, you might decide to plan on a lower income at 65.

mPower takes the same approach, although it's not as clear about explaining risk. ClearFuture shows you 21 possible mixes of stocks and bonds, aggressive to conservative. It picks funds from your 401(k) to match the level of risk you choose.

I ran two simple all-stock portfolios through all three systems. Each made different suggestions--no surprise there. But all were diversified, which is the first step to wisdom. Two added bonds. All showed that my sample employee wasn't saving enough.

I also checked how the three programs treated a heavy investment in your company's stock. mPower usually tells you to sell the entire position, because a single stock is always riskier than a diversified fund. ClearFuture suggests that you put no more than 10 percent of your money there. Financial Engines shows you how various positions in company stock raise or lower your total amount of investment risk. In their separate voices, they're all saying "beware."

By the way, you can also use these services independently. Try ($39.95 per quarter for advice); mPower on MSN Money ($20 a year), or ClearFuture at$30 today, but starting in early April sold only as part of a $109 package.

By now, you're probably asking the same question I did: with so many companies contracting for 401(k) advice, what's with those CEOs who say they don't dare in case they're sued? It comes down to how they read the pension law. The Department of Labor, which administers the law, has issued advisory opinions encouraging advice. "It's perfectly legal," says former DOL official Olena Berg Lacy. But Washington attorney Richard McHugh says that most of his clients won't provide it unless the Congress specifically says OK.

Fine--let's do it. But alas, the industry sees this as its chance to chip away at some of the law's consumer-protection rules. For example, the DOL has always insisted that companies offer independent advice. But the House just passed a contrary bill sponsored by Ohio Republican John Boehner. It lets the financial-service firms that provide your 401(k)--such as brokers, fund groups and insurers--advise you on whether to buy their own funds and even which ones.

Post-Enron, how can anyone even think of creating such conflicts of interest? You might as well turn the system over to an ice-skating judge. Boehner helped his bill sweep through by claiming, wrongly, that current law "prohibits" employers from hiring 401(k) advisers. The president backs Boehner. Ann Combs, DOL's assistant secretary for pension and welfare benefits, says she's sure that the conflicts could be managed, with disclosure. (Why don't I feel comforted?)

In the Senate, a bill from New Mexico Democrat Jeff Bingaman would end the time-tested rule that employers be liable for choosing advisers "prudently" and monitoring what they do. To encourage more 401(k) advice, he'd create less encompassing liability rules. But it's risky to be loosening this standard now.

There's one last reason companies might not want to bother with 401(k) advice, says Gerry O'Connor, of the Chicago-based consultant Spectrem Group. Employees say they want it but may not use it when it's there. Companies have to believe in it and promote it to make it work. And you have to step up to the plate yourself.