First employers offered pension plans. Then 401(k)s. Now, it's online 401(k) advice.
Online 401(k) advice is currently more hype than reality. Though more and more fund companies are offering it to employers as something they can give employees as part of their 401(k) plans, only a handful of companies have signed on and a slim number of their staffers are actually using it.
But before long, you might be offered the chance to plan your retirement portfolio online through your company, at prices cheaper than a real live human adviser. More than mere education, online advice for 401(k) investors includes individual asset allocations and even specific fund recommendations.
Ira Silverman is an early adopter. Five years ago, at age 48, Silverman had only $10,000 in retirement savings. He woke up to the fact he had to do something about it, quickly. But Silverman couldn't find an affordable financial planner willing to work with his relatively measly portfolio and he was equally disappointed in the investment seminars he tried.
, hooked him up with
, a company specializing in 401(k) advice. Today, Silverman says the risk/return and asset allocation capabilities of mPower's 401(k) advice has helped him choose several IRAs and a portfolio of individual stocks and build up sizable 401(k) holdings. Silverman, Fujitsu's director of hardware development, says he's now on target to retire comfortably at age 63.
The experience has made Silverman a fan of online 401(k) advice, but even he has disappointments. He says the tool contains historical risk, return and fee information only for the
funds in Fujitsu's plan, but not on the many other Fidelity funds available.
"Today's offerings ... are either too narrow to be useful or too complex to be usable. Most consumers get subpar advice -- or none at all," according to the February 2000 report "Overhauling Financial Advice" from
, which the firm says is still current.
"We are still a long way off from the ultimate advice engine, the one that has people saying, 'Wow!' " says Jaime Punishill, senior analyst with Forrester. He says online advice today is time-consuming and clunky because it requires a lot of manual keying and rekeying of data.
So what's the attraction? Employers see a need. "Employees are calling their HR departments, asking what risk is, what a long-term savings horizon is, what should be in their portfolio or whether or not to take a loan," says Deanna Johnson Keim, a spokesperson for the
American Benefits Council
, a trade association of employers that offer 401(k)s. "They are confused, and they are clamoring for advice."
At the same time, the growing universality of the Internet is making it possible for employers to offer advice at no or little cost to employees.
With these forces in play, truly robust online 401(k) advice that includes comprehensive fund data and that can answer complex investment questions will explode in 2001 or 2002, says Ted Benna, head of the
, a 401(k) advocacy group in Bellefonte, Pa.
But for now, only 17% of employers offer any form of 401(k) advice, according to
, an international employee benefits consulting firm. And not everybody at those companies uses the service.
Who's Using This Stuff?
Individual firm estimates of usage range pretty widely. Fidelity estimates that more than one-third of the companies that offer Fidelity funds in their 401(k) plans have signed up for the Fidelity Portfolio Planner online 401(k) advice. And of the 2.5 million investors who currently have access to it through their employers, approximately three-quarters of them are using the advice, says Beth Flanagan, vice president of new business development at Fidelity's retirement services group.
Other estimates are far less robust. Twelve corporate clients are making
Standard & Poor's
online Retirement Advisor available to 7 million plan participants, but only 3,000 are currently using it, says John Guido, VP of marketing at Standard & Poor's fund services. He attributes the current lack of usage to lack of awareness.
mPower, a leading 401(k) online advice provider, wouldn't reveal current participation levels, citing the time it takes to ramp up in terms of understanding and usage.
So who's actually doing the offering?
It's up to your employer to decide whether or not to offer 401(k) advice. Most companies offer 401(k) advice through one or more of the funds in their plan, which, in turn, are getting the advice from third-party (supposedly impartial) providers. mPower,
and Standard & Poor's are such providers.
The American Benefits Council says advice from a neutral third party instead of one of the funds in a 401(k) plan is the best source. Third parties don't stand to profit from which mutual funds you choose, but fund companies do, says James Delaplane, VP of retirement policy at the council.
and Fidelity have taken a different route and are offering free 401(k) advice directly. Both companies say their advice is objective because they recommend funds other than their own. However, most employers using Vanguard's Navigator Plus offer only Vanguard funds, says Sean Hagerty, principal of participant services at Vanguard.
Others say Vanguard and Fidelity are not so altruistic. An outside advice provider would be more likely to recommend funds outside the family, says Benna of the 401(k) Association. "Fidelity refused to align with a third-party advice provider -- because it would affect the bottom line. The advice that is given will influence how participants invest, and have an impact on Fidelity's financial results," Benna says.
Fido's Flanagan defends the objectivity of the company's product, saying it will recommend non-Fidelity funds. She also says that when Fidelity decided to offer advice in mid-1998, the third-party providers were less established. "There weren't a lot of players with a lot of history in this area."
Most fund companies have not taken the direct route, however.
American Express Retirement Services
T. Rowe Price
Scudder Kemper Investments
are among the many fund companies that have recently signed up with independent 401(k) advice providers.
What you'll pay for the privilege of this advice generally varies from nothing to around $15 a year. About half the time, employers are willing to pick up the cost. If they aren't, the price of this advice will vary depending on how many co-workers are using it, how complex it is and whether it includes access to live advisors. mPower charges each user $15 to $45 a year for its service.
The Quicken 401(k) Advisor by
is one of the more expensive offerings. This online service from
, which includes unlimited access to live advisors via the telephone, charges $19.95 a month after a free 30-day trial.
If you've never gotten any financial advice, the cost of online 401(k) advice could well be worth it compared to what a financial planner charges. But don't expect much at this early stage. The online planners help you to ask a lot of good questions but won't give you all of the answers.
Please let us know about your experience using online 401(k) advice, offered either directly or through your employer. Email