A Good, Hard Look at Your Retirement Holdings Can Be a Mouse Click Away

William Sharpe, of Sharpe ratio fame, is the brains behind the Financial Engines Web site.
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If you're like the rest of us, you've probably wondered whether that mishmash of retirement investments you've got stashed in your 401(k), your IRA and who knows where else will outlast you.

Unfortunately, investment strategies aren't scored like an Olympic event. There is no panel of judges holding up placards that rate your financial prowess. Now, however, there is something that comes close.

Financial Engines

(

www.financialengines.com), an Internet start-up, has developed sophisticated, Web-based simulation software designed to be brutally frank about whether your retirement investment choices will actually deliver you to the finish line. What Financial Engines promises for less than $60 a year is the sort of advice that previously was only available to institutional investors and the wealthiest among us.

The company, based in Palo Alto, Calif., isn't the first to offer online retirement advice. The

401k Forum, a pioneer in the field, provides 401(k) allocation ideas for employees at participating corporations. There's also

DirectAdvice.com, backed by deep-pocketed technology investor

Softbank

, which provides tailored financial planning to anybody willing to pay a $75 annual fee.

In investment circles, however, Financial Engines is the player that's generating the most buzz. In fact, three of the four largest 401(k) providers --

Merrill Lynch

(MER)

,

Hewitt Associates

and

State Street Global Advisors

-- have already signed up to offer the service to their customers, providing an instant base of 12 million potential users.

The new endeavor could hardly have a better pitchman. The I.Q. behind Financial Engines belongs to William Sharpe, the Nobel laureate in economics,

Stanford University

professor and the namesake of the Sharpe ratio (a measure of risk-adjusted return). Financial Engines essentially combines Sharpe's life work with advances in financial analytics and software technology. The result is a Web-based tool for an investor who may be wondering if he's got too much money riding on

(JAVLX)

Janus Twenty and not enough on his beleaguered small-cap choice.

"If I was to make a gross oversimplification of what Bill Sharpe is doing, I'd say he has introduced scientific rigor into investing decisions," says Paul Koontz, a general partner of

Foundation Capital

, a Silicon Valley venture capital firm that was one of the original lead backers. "Before now, investing has been a series of human judgments that are far from scientific."

Here's how it works: Financial Engines analyzes your holdings and simulates how they might perform in thousands of economic scenarios up and through your retirement years, using forward-looking financial models. Within seconds, the software can estimate in percentage terms your chances of having enough income to retire. For instance, the program might conclude that your portfolio of large-cap and foreign funds, as well as individual technology stocks, provides you with a 79% chance of reaching your annual retirement income goal of $120,000. Along with that prognosis, you'll also get a worst- and best-case scenario of what your portfolio could be worth the day you cut your retirement cake. This part of the process doesn't cost you a penny.

If your odds don't look so good and you're willing to pay $14.95 per quarter, the software allows you to improve your chances of reaching your goals by tinkering with several factors that you can control -- your projected retirement age, your yearly retirement contributions and your acceptable level of risk. It also will look at other funds available in your 401(k) plan and suggest changes in your asset allocation. To see an example of Financial Engines' recommendations, click on the graphic below.

The software will continue to monitor your portfolio, and if the forecasted results for your portfolio drop 5% since you last updated your plan, you'll be warned next time you log in. You'll also be notified upon logging in if the software has a new allocation recommendation for your 401(k).

The ultimate aim of the software, which took a team of Ph.D.s two years to develop, is to select for each customer the best mix of available investments. Under the hood, the basic investment methodology is Modern Portfolio Theory, which holds that money managers can't consistently beat the market, so investors should design portfolios that offer the best return for the least risk.

From there, the software's simulation technology can generate thousands of potential scenarios for key economic variables such as interest rates and inflation. Beyond that, the software projects what could happen to 15 key asset classes, such as junk, mortgage and government bonds, large-cap growth and value stocks, small-cap equities and emerging-market stocks. Layered on top of all that is analytical information on about 10,000 funds and 6,000 individual stocks.

Entering your holdings one by one into the software can be a tedious process if you have numerous funds and securities. But once you've done it, you can use Financial Engines as a portfolio tracker. Using real-time data, it will provide you with the value of your current portfolio anytime you visit the site.

Unfortunately, at this point, Financial Engines can't give your entire portfolio a tune-up. The software only suggests changes among offerings available in your 401(k) plan. The software takes into account other retirement holdings when making its projections, but that's as far as it goes. If your IRA rollover is a jumble of inappropriate investments, for example, Financial Engines can't help. But this big limitation should vanish soon. The company hopes to begin offering advice beyond 401(k) portfolios, perhaps as soon as later this year, promises Jeff Maggioncalda, the company's president and chief executive officer.

Lynn O'Shaughnessy writes frequently about personal finance and mutual funds and is the author of The Unofficial Guide to Investing (Macmillan).