Defined contribution investment advice is a flop.
The proof:
* Fewer than 20% of big 401(k) plans offer advice, and plan sponsors in general are uncomfortable with the fiduciary responsibility of providing it.
* Participants aren't using it - as few as 4% to as much as 20% (depending on the study) of those with access to investment advice actually use it.
* Providers aren't getting the entree to participants' rollover dollars they had anticipated. Indeed, the primary reason they got into that line of business was to gain access to more of a participant's money than just his/her 401(k) account.
* Nobody wants to pay for it - neither participant nor plan sponsor. "No one wants to pay for the advice, and that's the problem," said Fred Barstein, president and chief executive officer of 401kExchange.com, Lake Worth, Fla., a consulting firm.
The biggest failure has been online services, many industry executives and observers agree.
"The online approach has been a miserable failure because usage is not there and the cost of doing the initial integration is so high," said Ann Mahrdt, director of the Spectrem Group, a Chicago-based consulting firm. According to a soon-to-be-released Spectrem study, only 17% of plan sponsors make online advice available.
All advice is complicated, but particularly the online versions.
"It's too cumbersome for participants to input their data, even with direct feeds (of defined contribution plan information) from record keepers," Ms. Mahrdt said. Providers initially thought the service would build relationships and improve participant loyalty, ultimately allowing providers to capture rollover dollars, she said.
"When we first introduced advice to the market, online was the way to go because it was cheap," said Amy Tlachac, consultant and managing director at Great-West Life & Annuity Insurance Co., Greenwood Village, Colo.
Now, however, Great-West is supplementing its online advice by using field representatives to walk participants through the advice process either one-on-one or in groups, Ms. Tlachac said. The plan sponsor that beta-tested Great-West's new model increased advice usage to 10% of participants from 4% in the first month.She declined to name the plan sponsor.
CitiStreet, Quincy, Mass., and the Vanguard Group Inc., Valley Forge, Pa., also supplement their online advice services - both use Financial Engines Inc., Palo Alto, Calif. - with telephone assistance.
"I believe largely the market will continue to offer advice on the Internet and it will not be used any more than now," said Warren Cormier, president of Boston Research Group, Boston. "Plans will go largely unadvised."
Defending their business
Not surprisingly, online advice providers defend their businesses.
"Sixty to 70% of participants who log in (to Financial Engine's online-only advice) get a retirement forecast," and more than half get a specific recommendation, said Christopher Jones, executive vice president of financial research and strategy with Financial Engines. On average, 20% of a plan's participants use the online service within a year after it's made available to them, he said. Mr. Jones acknowledged, however, that at Financial Engines, this figure includes everyone who logs in, regardless of whether they proceed further.
Some online providers are changing their models.
"Online advice works pretty well for 20% of the marketplace," said John Rekenthaler, president of Morningstar Associates LLC, Chicago. "The other 80% need to be reached another way."
To that end, Morningstar will soon launch an advice service that incorporates telephone advice and paper statements with its original online approach.
Merrill Lynch & Co. Inc., Pennington, N.J., is another major player that is recognizing that advice includes more than the online component.
Merrill next spring will launch its own three-part advice service, working with Ibbotson Associates, Chicago, as its outside advice provider. (It still has a separate relationship with Financial Engines for providing online advice.) The new Ibbotson service will include an online component but also will feature telephone assistance and financial advisers, said Diane Talbot, director of 401(k) products.
"What we've heard loud and clear is that individuals want a more personal experience," she said. "We had the typical experience with lower adoption of the (online-only) service and lower use of the service," she said.
Not that popular
Online or not, plan sponsors aren't beating down doors to offer advice. Overall, 44.4% of plans offer investment advice, according to a recent survey by the Profit Sharing/401(k) Council of America, Chicago. The survey revealed, however, that smaller plans are much more likely to offer the service. So, 55.5% of plans with fewer than 50 participants offer advice, compared with only 25.7% of plans with more than 5,000 participants.
Executives at many large 401(k) plans, meanwhile, say they are unwilling to offer advice until it is officially sanctioned with some sort of safe harbor protection by Congress or the Department of Labor.
And even when offered, advice is not widely used.
Shefalie Desai, assistant vice president of participant relationship management for MassMutual Financial Group, Boston, said only 4% of participants in plans that are serviced by MassMutual and have access to advice actually use it.
MassMutual's experience is consistent with the industry, said Boston Research Group's Mr. Cormier. "The take-up rate is extraordinarily low, well under 10%, with most reporting under 5%," he said.
The solution appears to be personal advice.
Participants want face-to-face advice, but that takes a substantial investment, noted Brian Rom, president of Investment Technologies, New York. His firm tried to offer online advice, but "the market got in the way," he said.
The human touch, either in person or on the telephone, is more expensive than online advice. Although some record keepers are trying to cover the costs with wrap fees, consultants say it remains to be seen whether record keepers can afford to offer the pricier human component in a world where profits are already being squeezed dry.
Who'll foot the bill?
Another question is who is going to pay the cost of advice.
Last year, only 11% of participants paid for an automated advice service out-of-pocket, according to data from consulting firm NewRiver Inc., Andover, Mass. In 2001, 21% of sponsors that offered advice to participants paid for it, down from 48% the year before.
When a company pays, however, it usually pays for only the basic service, and it does so from plan assets. Some 13% of participants pay for the service from their 401(k) accounts, and just 4% of plans that offer advice share the cost with the participant. Some 60% of the cost for advice was included in the provider's bundled fee in 2001, up from 24% in 2000.
Fees are usually based on eligible participants, and record keepers are willing to pay in order to establish a relationship with the plan participant, Financial Engines' Mr. Jones said. Ultimately, however, the plan sponsor pays because the vendor includes advice in fees for bundled services.
"Sponsors don't want to pay for it, and they are afraid of the fiduciary liability. That threw everybody off, not only us," said Mr. Rom.
"In almost all of (Financial Engine's) relationships with plan sponsors, the plan is picking up the tab," Mr. Jones said. "A number of providers are looking to advice as not just a cost of doing business but a potential revenue opportunity that sponsors will be willing to pay for."
Advice is critical to record keepers' success in capturing the assets of retiring baby boomers, according to a new study by NewRiver. In the next four years, 401(k) distributions will continue to increase from an estimated $172 billion in 2002 to $277 billion in 2006. To capture participants' money - and not just their defined contribution assets - providers need to offer advice, she said. The goal is for participants to identify the record keeper as their trusted expert.
"For retirees it is the advice offered in a securities and brokerage relationship and the income products offered by insurance companies that are attractive," said Darlene DeRemer, managing director at NewRiver.
