Cover | Published in May 2004

Have It Your Way

Do-it-for-me programs and vanishing fees finally may bring advice to the 401(k) masses

By Randy Myers | May 2004
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Do-it-for-me programs and vanishing fees finally may bring advice to the 401(k) masses

If parents had worked as hard to get their teenagers to do homework over the past decade as the 401(k) industry worked to turn Americans into savvy retirement investors, every kid in America would have graduated on the honor roll. Unfortunately, even the most lackadaisical C student still spends more time studying for algebra tests than the typical American worker spends on his retirement portfolio. As a result, the great American do-it-yourself retirement plan, the 401(k), is poised to become the great American do-it-for-me plan. Most folks, it is now clear, are no more interested in learning to build a retirement portfolio than they are in learning to replace the brakes on their minivan, and the 401(k) industry is finally offering to do the job for them.

A small clutch of investment advisors has been managing individual 401(k) accounts for years, of course, including 401(k) Toolbox in Bogart, Georgia; Scarborough Group in Annapolis, Maryland; ProManage Inc. in Chicago; and Guided Choice in San Jose, California—not to mention untold numbers of stock brokers, financial planners, and the like. Now, however, the nation's biggest and best-known advice providers are wading into the business: Financial Engines; Morningstar Associates, which last year acquired industry pioneer mPower; and Ibbotson Associates. So are newcomers like ProNvest, a young, Atlanta firm with a novel approach: It offers advice online and via telephone absolutely free of charge, betting that it can earn its keep strictly from those plan participants who pass on the DIY model and hire ProNvest to manage their accounts for them.

The ProNvest approach is just one more sign that online advice, by itself, is becoming a commodity with less and less cash value to plan sponsors. Ditto for Charles Schwab's decision last September to offer Guided Choice advice to participants in the retirement plans it administers without explicitly passing along any charges to plan sponsors or their employees. Advice is now simply part of the Schwab package, insists Trish Cox, vice president of education and advice for Charles Schwab Corporate Services, and sponsors that spurn it will not get a price break for doing so. The arrangement differs from the ProNvest model in that Guided Choice itself at least gets paid by Schwab. By contrast, ProNvest collects nothing from the plan sponsors that elect to offer its service, nor from any plan providers with which it might do business. "We've changed the game," says ProNvest President Richard Magrath. He says his company's business model is predicated on winning just 5% of eligible participants to its managed account service, and notes that his firm already is working with more than 30 corporate plans.

The rush by advice providers to add new components to their service line-up is yet another indication that online advice is a failing proposition as a stand-alone product. To cite just one example, Financial Engines' basic service offerings now include online advice, call center help, managed accounts, and hard-copy Personal Evaluation statements that can be sent by mail to each participant in a client's retirement plan. The statements calculate how large a participant's nest egg is likely to be at retirement as it is being funded currently, suggests whether the participant might be able to do better by following Financial Engines' advice, and steers the participant to that advice if she is interested. Schwab, meanwhile, is offering Guided Choice's advice through three delivery channels—online, through a call center, or a face-to-face meeting with a Schwab advisor. While managed accounts per se are not part of the service, participants can choose to have Guided Choice automatically rebalance their portfolios on a periodic basis.

To be fair, no one is suggesting that online advice is dead, and the big providers continue to enhance their online products. However, there is widespread conviction that the future for online advice lies in being part of a suite of offerings, each designed to appeal to a different segment of the participant population.

Schwab, for one, believes online advice continues to have a strong future, especially when it is made available free to sponsors and participants. "There's been a lot of debate about whether advice is working or not," Cox says. "We are very optimistic that it is working. In the first four months after we offered this, 25% of our existing clients whom we believe would consider advice in their plans—meaning their plan design and investment lineup would make their plans suitable for advice—already have returned their service agreements electing to offer it." Matthew Szlapak, benefits manager for the Airline Pilots Association, also remains a fan of online advice. His organization began offering Financial Engines' advice in 1999 and, since then, approximately half its 520 participants have used it. "We pay about $45 dollars a year per person, and I think, for that, it's a great value," Szlapak says.