SKIP THE BROCHURES: RETIREMENT ADVICE GOES ONLINE
Personalized investment help for the masses is on the way
To help employees choose investments for their 401(k) plans, companies may offer workbooks, seminars, videos, audio tapes, CD-ROMs, and even the Internet. But these educational resources can fall short of what many employees really want: an investment pro to tell them where to put retirement dollars.
Well, that's coming soon. With the help of sophisticated software and cheap delivery systems, personalized investment advice for the masses is on the way. Among the first to offer advice to investors through their employers: San Francisco-based 401(k) Forum Inc.; Financial Engines Inc., a Palo Alto (Calif.) adviser launched with the backing of Nobel economics laureate William F. Sharpe; and Los Angeles-based TCW Group. Because it also manages mutual funds, TCW had to get a Labor Dept. waiver so it could give advice on investing in its own funds. TCW manages $50 billion, mainly for institutions, while 401(k) Forum and Financial Engines were started to provide 401(k) advice.
There's not yet much real-world experience with these services. Only 401(k) Forum is actually serving investors at three companies: Fujitsu America, Oracle, and Findlay Industries, an Ohio auto-parts manufacturer. Financial Engines plans to announce its first company clients soon, and TCW hopes to be giving advice by next summer.
"Finally, there's a service that answers everybody's last question: `How do I invest this money?"' says Oona Huber, benefits administrator for Fujitsu America Inc. in San Jose, Calif., which has been testing 401(k) Forum's service. "Instead of a booklet that says 35-year-olds should have X percent of their money in growth stocks, 401(k) Forum gives the user actual allocation advice drawn from the 10 fund options in our plan," adds Huber. Some 1,000 employees at three sites have been offered the service since June, and Huber hopes to roll it out to the company's 5,000 employees in January. Fujitsu, for one, plans to pick up the bill.
How much will this nifty advice cost? Providers say that after startup expenses, the annual cost for plans with at least 1,000 participants should be $25 to $50 per employee. TCW isn't charging directly for advice, but it will use the service as a way to sign up companies as 401(k) customers.
The services rely on the asset-allocation models long used by institutional investors. Defined-contribution pension plans like the 401(k) have shifted "investment responsibility from institutions to individuals without shifting the expertise needed to exercise that responsibility," says Jeff Maggioncalda, president of Financial Engines. "We're bringing that expertise to individuals in a cost-effective way."
To become a client, participants complete an extensive online questionnaire that also asks about non-401(k) investments, just as a personal adviser would. Employees then get specific information, cranked out by a software program, about how much to invest in which funds. The services don't counsel individuals on outside investments but do take them into account. "If most of a person's outside holdings were CDs, we might recommend more aggressive investments for the 401(k) than he might otherwise get," says Brian Tarbox, a TCW senior vice-president.
These online advisers also can react to changes both in an employee's circumstances and the markets', for instance by sending E-mail to participants when a change in investments is recommended. Financial Engines will even advise clients who hold a lot of company stock in their 401(k)s on how to offset that risk using the funds in their plans.
No doubt these digital-era investment advisers will face competition soon. Robert L. Reynolds, who heads the 401(k) business at Fidelity Investments, says the mutual-fund giant hopes to unveil an advising plan soon. But Reynolds specifically talks about "guidance" rather than "advice," raising the possibility that Fidelity's effort might stop short of telling investors which funds to buy.
Some in the 401(k) business think offering advice will come back to haunt plan sponsors if the advice fails to produce good results. And some say investor education beats advice any day. Says Debbie Mandelker, director of employee services for Merrill Lynch & Co.'s 401(k) business: "You know that it's better to teach a hungry man to fish than give him a fish."
Maybe so. But for the millions who may worry about their ability to hook a winning return, some sound investment advice will be far more satisfying.By Jeffrey M. Laderman in New York