Just as many employees are wondering if their 401(k)s are really such a sweet deal, the federal government has given employers the green light to provide professional investment advice for their employees. Last year, both the 2001 Tax Act and the Department of Labor made provisions for financial planning for individual investors in 401(k) plans.
Law Changes and Rulings
The 2001 Tax Act provision is simple: Qualified retirement planning services are excludable from income. This includes both advice and information about investments.
The Department of Labor ruling is slightly more involved, as it changes the nature of the Employee Retirement Income Security Act and allows third-party advisers for 401(k) plans. In the past, ERISA held employers liable for advice given to employees, even if it was from a third party.
New Opportunity
These recent developments may open a door for CPAs with financial planning experience to offer their services to companies with 401(k) plans. And for consumers, third-party professional advice could help them invest their funds judiciously, if at all.
"The original concept of the 401(k) is to put the choices in the employee's hands," says Ric Rosario, vice president of risk management at CAMICO. "But many 401(k) plans were set up initially with few options for investing. This increased the companies' liability because it limited the employees' investment options. New plans give employees more options, but they also have the potential for more confusion because many employees don't have the expertise to determine what is the best plan for their investment."
Is There Money In It?
According to Mike Eisenberg, a West Los Angeles-based CPA, PFS, who currently advises his individual clients on their 401(k) investments, some cost-benefit analysis is required before leaping in to this expanded practice area. "It's really a matter of determining whether or not you can make money on advising for 401(k) accounts," says Eisenberg.
"If I choose to offer any of this kind of advising, it won't be an across-the-board service. I'll have to evaluate potential clients case-by-case to determine whether it will be a profitable venture on both sides."
Peter Lucier, a Temecula-based CPA, PFS, says a stumbling point may be that "Many companies will want to roll advisory services costs into the general 401(k) administration and pass them on to employees. The pricing has to make sense to everyone."
Thinking About the Risk
"CPAs need to protect themselves from risk," says Rosario. "They can do this first and foremost by writing a clear engagement letter that defines their role with the investor."
Rosario says the engagement letter should include the exact type of service to be given. Will the CPA only provide advice? Will the CPA monitor the investments? What should the company and investors expect from the adviser?
Accountability is key, says Rosario. "It is critical that CPAs ultimately not allow clients to shun their responsibility of investment risk by delegating decisions on investment goals and the necessary specific investment decisions that will follow."
Her Feet are Wet
Sheryl Rowling, a San Diego-based CPA, PFS, already has ventured into this new market and thinks it is a great opportunity for CPAs willing to make the commitment. "With the Enron situation, companies are starting to understand their responsibility to employees when it comes to investment," she says.
Rowling adds that it's no longer enough to allow employees to self-manage their funds because the average person isn't sophisticated enough to intelligently manage their money. "This isn't just a money-making venture for CPAs," she says. "It's really a badly needed service in the market."
But Rowling also warns that this isn't a casual endeavor. "Being qualified to do the job is of utmost importance," she says. "It can only be lucrative and worthwhile if you are prepared and can offer sound advice to clients."
Lucier agrees that the quality of the advice is what counts, and adds that CPAs should be prepared to convert their analytical knowledge to basic facts about retirement planning.
"You need to be prepared to advise anyone at the company," Lucier says. "From the people on the factory floor to the executives. The level of employees' knowledge can vary greatly and you really need to be prepared for anything."
Jane Girard is a CalCPA contributing writer.
© 2002 California Society of Certified Public Accountants. For reprint permission, contact Aldo Maragoni, managing editor.
