Merck & Co. Inc., Whitehouse Station, N.J., and 3Com Corp., Santa Clara, Calif., have selected Financial Engines to provide investment advice to their 401(k) plan participants.
Now, industry insiders are waiting to see whether the moves by Merck, with its $2.7 billion 401(k) plan, and 3Com, which reportedly has about $114 million in its plan, will cause the 3-year-old industry to finally take off.
"I'm starting to see much more momentum with investment advice," said Gregory D. Metzger, consultant with Watson Wyatt Worldwide, Bethesda, Md.
He and Rich Koski, principal with Buck Consultants Inc., New York, both said investment advice will get off the ground through advice-giver deals with defined contribution service providers.
"What I'm seeing are vendor-level deals," Mr. Koski said.
Money is one factor motivating the deals. ". . . Service providers need something else to put in to justify fees," he said.
The still-open question is who is ultimately going to pay for the advice, he said.
Originally, independent advice providers such as Financial Engines Investment Advisor, Palo Alto, Calif., and 401(k) Forum Inc., San Francisco, floated business structures under which plan sponsors would contract with them separately and pay per-participant fees.
However, both Merck and 3Com are paying for Financial Engines' Internet advice service based on the number of plan participants who actually use the service, according to executives at those companies.
Financial Engines' current pricing model includes a one-time set-up fee of $2,500 to $50,000, depending on the plan's complexity. Then, in cases in which the plan sponsor pays, fees are charged on an annual per-user or per-participant basis with a "significant volume discount" for the per-participant option, said Brian Samuels, Financial Engines vice president of field operations and business development.
If the participants pay, they can do so by credit card or, if Financial Engines has an agreement with the service provider, come from the participant's 401(k) account, Mr. Samuels said. There is also a payment option in which the company and participants share the cost.
All six of the plan sponsors currently using the service, including Merck and 3Com, are picking up the tab, he said. Half are paying per participant and half are paying per user, Mr. Samuels added.
The big question is whether plan sponsors will underwrite the costs or make participants pay.
"If employees have to write a check, the utilization rate will be lower," Mr. Koski said.
Soon Buck Consultants and its partner Dreyfus Retirement Services, Uniondale, N.Y., will make a deal with an independent investment advice provider, Mr. Koski said. "We will construct the interface to make it easier for the clients to sign on."
However, some consultants worry that plan sponsors providing participant advice will view it as a replacement for education.
"This is particularly so since a lot of advice is by the Internet, which is a good forum for providing information but not giving complete education," Mr. Metzger said.
Advice and education
In an ideal world, plan sponsors that provide investment advice would not slack off on education.
But, said Roxanne Fleszar, principal and founder of Financial Resources Management Corp., Peabody, Mass., a consultant to mid- sized plan sponsors, "I do not think that is the practical answer."
Turner Broadcasting System Inc., Atlanta, which was purchased by Time Warner Inc., has always provided investment education to participants in the $3 billion merged 401(k) plan through its bundled provider Fidelity Investments, said Lisa McMichael, Turner's director of employee benefits. Next year, company executives will investigate establishing a partnership with an independent investment adviser, she said.
While advice is catching on, some question whether the employees who really need the service will use it, said Tom Schenk, president and chief executive officer of consulting firm Harbor Advisors Inc., Spokane, Wash. "There are guys who have saved $10,000 on a good day who have to parlay a retirement portfolio that has to get into the six figures."
Another issue is whether Web-based independent advice givers will have to augment their Internet approaches with call centers, paper-based systems and one-on-one in-person investment advice.
Human interaction costs more than the Internet. Still, for now, paper systems and call centers are necessary for certain companies like manufacturers, said Ms. Fleszar, who has a strategic alliance with 401k Forum.
But, she added, "In three to five years, the Internet will be more pervasive than today."
There is an additional concern that participants will see advice the way they currently view broker stock tips, Mr. Metzger said.
"Participants may follow the advice in up markets and shy away during down markets," he said.
Plan sponsors launching advice programs now, ahead of the crowds, appear to be doing so cautiously.
Before Merck hired Financial Engines, Merck officials put Financial Engines through a lengthy review process that included three sets of trials, said Wayne Folkart, Merck's manager, executive benefits.
For now, the advice service will be provided only to the 20,000 participants in Merck's salaried employees' 401(k) plan, Mr. Folkart said.
Financial Engines executives are not ready to claim the victorious launch of the advice industry.
"I think it's dangerous to become too optimistic because ultimately we have to prove ourselves on a case-by-case basis," said Jeff Maggioncalda, president and chief executive officer of Financial Engines.