Looking for an Impartial Voice on Retirement

For befuddled 401(k) investors, help may be on the way.

Employers are increasingly using Web sites that offer independent 401(k) investing advice. In the wake of Enron, industry leaders Financial Engines and mPower report a surge in interest from employers.

The trend, which could mark a welcome shift for 401(k) participants, has occurred amid growing awareness that many employees are hard-pressed to manage their retirement accounts entirely on their own. Many have seen their balances dwindle during the market downturn. Yet even now, participants often receive little aid in figuring out how much to save or where to put their money.

Meanwhile, legislation that would make it easier for employers to make advice available has stirred up concerns about conflicts of interest. One bill that passed the House would let advisers from mutual fund outfits and insurers recommend funds from their own companies to 401(k) investors.

In light of those concerns, employers are taking a closer look at the potential value of advice from independent sources, which don't have reason to tout one fund over another.

The leading advisers had already seen a pickup in demand over the past year or so, as employers sought to help their workers navigate the stock market's decline. "People were already getting nervous. But Enron galvanized a whole new group of companies to say, 'Now's the time to be thinking about this,' " says Jeff Maggioncalda, CEO of Financial Engines.

In response to the surge in interest, six-year-old Financial Engines recently nailed down new accounts with United Technologies (UTX Quote) and J.C. Penney (JCP Quote), as well as smaller employers. In just the first quarter of 2002, the number of people with access to Financial Engines' service grew by about a third, or around 600,000 people.

"Even six months ago, plan sponsors might have thought twice about whether to add online investment advice" because they weren't sure their employees would use it, says Lori Lucas, a defined contribution consultant for Hewitt, a benefits consulting firm. Now that's changed. An April survey by Hewitt found that 27% of companies were likely or very likely to offer online investment advice in 2002, in addition to the 21% that already offer it.

Lucas attributes the shift to post-Enron awareness of the need to diversify 401(k) portfolios.

Indeed, when J.C. Penney hired Financial Engines this February, the retailer said it was concerned that its employees weren't diversified enough. Too many were simply choosing the default option in its 401(k) plan, a bond fund, the company explained.

To be sure, employers still harbor concerns about whether they're susceptible to lawsuits if they make advice available to 401(k) participants, whether it's from independent Web sites or any other source. But at least some believe efforts to help employees actually reduce their potential liability, making it more likely that their workers will be financially ready for retirement.

"We felt as a plan fiduciary, it would be better for us to offer some advice on the 401(k)," says Michele Frost, benefits manager for United Technologies, which recently signed on with Financial Engines. "We felt we would be exposing ourselves more if we offered the 401(k) benefit and then stepped back and let employees go off on their own to figure out what to do with their money and asset allocation."

As long as the company was offering a 401(k), she said, it wanted its employees to understand how best to make use of it.

How Online Advice Works

Financial Engines and mPower both help investors figure out how much money they need to save for retirement and determine the right asset allocation. Depending on the level of risk someone is willing to take, the sites illustrate how much volatility an account would experience.

Investors can tailor advice to their situation. mPower even lets investors spell out the cash flows they'll need, year by year, after retirement. For example, if you wanted to buy a $400,000 second house the first year you retire, the site could incorporate that into your financial plan.

Still, the sites don't offer the breadth of advice that an independent financial planner could.

Both Financial Engines and mPower give 401(k) advice only on options already within a plan offered by an employer. Say a company's 401(k) was stocked with only Putnam funds, for example. In that case, the online adviser wouldn't recommend that an investor dump a Putnam fund and replace it with an outside fund from Wasatch.

Because the sites are meant to be primarily Web-based, investors have little opportunity to discuss more complex questions with a person. mPower formerly took calls from 401(k) participants by phone but says it dropped the service in response to low demand. Financial Engines makes limited phone service available to clients who request it.

But despite the constraints of Web-based advice, some help is an improvement over no help at all. And offering service through the Internet is cheap enough to appeal to budget-conscious employers. "I don't see a state of the world, ever, where the big Fortune 500 companies have a personal financial adviser who will come into the office, sit down and talk through their retirement plans with them face-to-face with each employee," says Maggioncalda.

In exchange for online advice, employers usually pay an annual subscription fee per 401(k) participant. For instance, Financial Engines charges $15 a head for offering 401(k) advice. At some companies, employees can opt to shell out another $20 to get specific advice about all investments outside their 401(k).

So far, online advice appears to be helping 401(k) investors. Both investment sites claim that participants save more and change their asset allocations after obtaining advice. According to mPower, participants raised their average 401(k) contributions from 7% to 10% of their paychecks after receiving its advice.

Meanwhile, Financial Engines found that nearly half of those who used its service received recommendations to change their portfolios. Of that group, 54% made changes in their accounts, while another 36% said they planned to.