PALO ALTO, Calif. — Financial Engines Inc. is slashing its fees to better compete with target-date funds as the default option of choice for automatically enrolled 401(k) plan participants.
In light of the Department of Labor finalizing the qualified default investment alternatives last month, Palo Alto-based Financial Engines is offering its managed account service at no cost for new participants. The DOL named managed accounts, balanced funds and target-date funds as appropriate default options for automatically enrolled participants.
Under the new pricing model, Financial Engines will waive the managed account fee for the first $5,000 in each new participant’s account when 401(k) plan executives select managed accounts as a plan’s default option.
Ken Fine, executive vice president of marketing at Financial Engines, is hoping the new pricing model gives the firm an edge in winning auto-enrollment business.
Target-date funds thus far have overwhelmingly been the default option of choice for plan executives adopting automatic enrollment.
The Pension Protection Act of 2006, however, has changed the game for managed accounts, said Mr. Fine.
“Legislation has made it clear to plan sponsors that managed accounts are an effective and appropriate service,” he said.
Under the new pricing model, automatically enrolled participants will get professionally managed accounts free of charge for approximately 18 to 24 months, he said. “This new pricing enables us to help those participants that need the help the most.”
When a plan sponsor selects managed accounts as their plan’s default option, the first $5,000 of a participant’s 401(k) plan balance will not be subject to a management fee for as long as the participant remains in the managed accounts service. Participants can, however, opt out at any time, he said.
As of Sept. 30, 22% of participants in Financial Engines’ managed accounts were automatically enrolled. The firm expects that number to grow significantly in the next year.
Financial Engines managed $15 billion in managed account assets as of Oct. 31. Mr. Fine declined to discuss sales goals for the new pricing structure.
Defined contribution plans that make matching contributions in company stock will be a boost to Financial Engines’ business in the coming months, he said.
The DOL regulations state that if a plan sponsor matches 401(k) contributions in company stock, they must select managed accounts as their default if they want to gain fiduciary protection for the money invested in company stock.
“In talking to plan sponsors about managed accounts vs. target-date funds, many plans are concerned about company stock. Managed accounts could provide a broader spectrum of help there,” he said.
Another reason plan sponsors default participants into managed accounts is the ability to use the existing investment lineup to create personalized portfolios, he said. “This is not something that you can do if you’re a product like a target-date fund.”
