No matter how many 401(k) investment sessions Lisa Crosby schedules for employees at Fujitsu America in San Jose, Calif., someone invariably sidles up afterward with one question she can’t answer: “So, what would you do if you were me?”
It’s not that the 20-year human resources veteran doesn’t have opinions or the desire to help co-workers. It’s that few companies–if any–want to advise workers on how to invest their retirement accounts. It just isn’t worth the risk of being sued if the advice turns sour.
“It kind of tugs at you a little bit,” Crosby said. “They need help.”
Finally, such help is readily available. For Fujitsu, the answer is 401k Forum Inc., a San Francisco startup that last year was the first to go live with on-line investment advice tailored to an employer’s 401(k) plan. But in the past two months, several new competitors have stepped up with software and on-line 401(k) advice, including Financial Engines Inc. and mutual fund powerhouses Fidelity Investments and Vanguard Group.
And though such advice currently is available only to employees at participating corporations, some day soon it will be available to the public for a price that’s a fraction of what a financial planner would charge.
“This is the dawning of on-line advice, the earliest stage,” says Michael E. Gazala, a senior analyst with Forrester Research Inc., a technology research firm in Cambridge, Mass. “You no longer have to think about advice as the province of the very rich.”
There has been little argument about the need for such advice. By implementing 401(k) plans rather than old-fashioned pension plans they manage on behalf of workers, employers have forced amateur investors to assume a role previously performed by pension pros. Yet they typically provide a diet of bland, generic educational material that’s of little help to many Americans, especially those for whom a 401(k) is their only exposure to stock and bond markets.
“It is neither feasible nor economically possible to train 30 million pension managers,” said Jeff Maggioncalda, chief executive of Financial Engines, which hopes to sell its advice to the public in the latter half of 1999.
While many companies once believed–wrongly–that it was illegal to provide advice, a growing number of companies now believe they are at greater risk if they don’t do so. The new fear: Workers with inadequate 401(k) stashes will sue, claiming their employers should have done more to teach them about investing.
“There is still a litigation fear. There is clearly a paranoia element to it,” said Dallas Salisbury, president of the Employee Benefits Research Institute in Washington. “But it’s just a different form: `What if I don’t tell them (how to manage it)?’ “
“Our deal in the past has been, `We’ll give you the best hammers and nails, you figure out how to build the house,’ ” said Vanguard Chairman and CEO John J. Brennan. “And (investors) are saying, `We love your hammers and nails, but give us blueprints as well.’ That’s what this on-line advice is all about.”
On the face of it, Vanguard has the edge in price because its Navigator Plus software is free to its 401(k) clients. “It’s a tough sell against us if you’re a competitor,” said Jim Norris, a principal with Vanguard’s institutional arm.
By comparison, Financial Engines charges $30 to $50 per participant per year and 401k Forum charges $15 to $60. (Fidelity declined to specify its charges.) That’s too much for many small businesses, says pension expert Salisbury, because it could double an employer’s administration costs. But that misses the point, benefits bosses say. The real issue is how much they’d have to spend to get comparable advice from a financial planner.
The winners and losers will become clearer in time. But one thing already is certain: The competition will be lively.
“It’s kind of like the debutante ball, the coming-out ball,” said Forrester’s Gazala. “If this takes hold–and I’m pretty optimistic–I think what we will see is other software companies, other registered advisers, other investment companies saying, `How do I get a piece of this?’ “
Here are thumbnails on the four programs, based on demonstrations and descriptions by company officials.
– Financial Engines (www. financialengines.com). The latest entry in the field uses a quantitative process that focuses on getting the highest return while taking the least amount of risk.
Most financial software is based on “deterministic” methodology. Typically, you plug in such factors as how much money you want to accumulate, when you want to tap it, the expected investment return and inflation rate. What results is a single number showing how much money you’ll have at the end. In many programs, this is translated into a surplus or shortfall.
The flaw is that deterministic models are based on the inherently false assumption that inflation, investment returns and other factors will continue unchanged year after year. Anyone who blanches when the Dow Jones industrial average plunges 500 points in a day knows that’s impossible.
Instead, Financial Engines’ software relies on “probablistic” methodology that uses historical data as a harbinger of things to come for 9,000 funds and 5,500 stocks.
Typically, software examines asset classes (stocks, bonds, cash, etc.) or sub-asset classes (blue-chip stocks, small-company stocks, junk bonds, etc.). Financial Engines ignores such labels and analyzes the style of an asset based on its investment return.
“Don’t tell me what it’s called; tell me how it acts,” said Maggioncalda.
– 401k Forum (www.401kforum. com). Like Financial Engines, 401k Forum relies on quantitative analysis to project how portfolios will perform. But 401K Forum also leans heavily on a team of analysts to monitor mutual funds. If a fund manager says he’s changing course, an analyst can react immediately without waiting for the computer to spot the statistical wake.
The probablistic model is as imperfect as the deterministic model, said Chief Investment Officer Scott Lummer, noting that any given forecast will be wrong as soon as, say, an investor is laid off, wins the lottery or is struck by a bus and disabled. “We live in a random world,” Lummer said.
401k Forum’s program has the look and feel of friendly retail software. Many employers will be drawn to 401k Forum because its materials are customized. It also provides loads of educational material for those who want it, either on the Web or in mailings or e-mail.
– Fidelity Investments (www. fidelity.com). The Web-based PortfolioPlanner by Fidelity will appeal to many investors because it uses a “look-through” tool to assess the actual allocation of stocks, bonds and cash within the available mutual funds. That assessment views the components of each portfolio four ways: by asset allocation, investment style, industry sectors and foreign holdings.
Such a compositional X-ray could be handy for investors who believe, for instance, that they own a 100 percent stock fund but actually have 29 percent invested in bonds or cash, as was the case with Fidelity Magellan in 1996.
One drawback is that PortfolioPlanner’s compositional analysis relies on data that typically is months old. Rather than use its internal knowledge of Fidelity funds, however, the company uses quarterly data from Morningstar Mutual Funds to deconstruct Fidelity and non-Fidelity funds alike. You could say the data is comparable because it comes from the same time periods, or you could say it’s all equally stale.
– Vanguard Group (www. vanguard.com). Vanguard’s Navigator Plus is a story of contrasts. Although Vanguard is a technological leader, the software is available only on CD-ROM or by downloading it from the mutual fund company’s Web site. To get the latest data, users must download it.
On a conceptual level, the software has the broadest financial-planning focus, with four modules for college, retirement, investments and estate planning. Yet its 401(k) recommendations dig down only to sub-asset classes.
As for the advice itself, the software defaults to index funds–Vanguard’s strength–unless users override it, and the company is uncomfortable recommending non-Vanguard funds because it can’t ensure outside funds won’t change their focus.
