Advice Now An Integral 401(k) Component: Vanguard

March 2, 2001 ( - Plan sponsors should expect advice as an integral part of their 401(k) program offering, according to the head of Vanguard's institutional services group.

Yesterday, Vanguard and Financial Engines announced a “strategic relationship” through which Vanguard 401(k) clients and their three million participants will be able to receive free investment advice from Financial Engines.

According to William McNabb, Managing Director of Vanguard’s Institutional Investor Group, the decision to embrace the new model was strategic and not a reaction to client requests.  “There was no hue and cry to change,” he told, while admitting that some clients had been pushing for a more substantive advice solution.

For Vanguard, the move means that money spent to build, expand and maintain their own advice capabilities can be directed toward other pursuits, including investor education.  For Financial Engines it offers quick access to millions of Vanguard 401(k) participants, as well as the opportunity to tap into the mutual fund giant’s vast retail investor network.

Neither party would disclose the financial arrangements behind the relationship.

Vanguard acknowledged that participant resistance to paying for advice was a consideration in their final decision to consider a partnership. 

“Live” Wire
The 401(k) service contemplates access to live advisors, as well as the online component, Jeff Maggioncalda, Financial Engines CEO told  Tim Buckley, Principal of Vanguard Web Services noted that support would likely be provided through Vanguard’s call centers through the use of “collaborative browsing” where support personnel accesses the same screens as a participant, and can walk them through the process.

Vanguard said they “looked at everybody you can imagine” in the advice provider business as part of an intensive due diligence process.  Tim Buckley, Principal of Vanguard’s Web Service Group, said Vanguard considered:

  • Methodology – did the advice “answers” make sense?
  • User Interface – was the approach truly creative, or just bringing a paper process online?
  • People – the talent behind the design and approach
  • Culture – a match with Vanguard’s focus on shareholder interests
  • Creative Business People – willing/able to think creatively in structuring the deal

Tax Take

A key differentiation in this alliance is the commitment to offering “tax efficient” advice to the retail marketplace. Maggioncalda said. “Taxes matter a lot,” acknowledging that uninformed investment advice can trigger “significant tax penalties” as investors liquidate holdings.

While the service will be free to 401(k) participants, it is likely that the retail expansion of the services will have a price tag attached, although the particulars of that approach have not been finalized, according to McNabb.