Big American companies have been adding online financial advice to their 401(k) plans, but most employees aren't bothering to use it.
"Online advice does work for those who understand investing," said MacGregor Hall, managing principal at Deschutes Investment Advisors in Portland, Ore. But, he said, "the majority of participants, those who really do not know much, are not taking advantage of these services."
A survey in 2001 by the Profit Sharing/401(k) Council of America found that, at most, 21 percent of employees have ever used 401(k) advice at the large companies that provide it. When big companies decide to provide financial advice as a way of fulfilling their fiduciary responsibility, nearly 60 percent choose online advice, according to the council.
In January, for example, General Motors hired Financial Engines of Palo Alto, Calif., to supply online advice to its 100,000 participants in 401(k)'s. "We felt this was a logical step in keeping our employee benefit programs state of the art," said R. Charles Tschampion, the managing director of defined-contribution plans for GM Asset Management in New York. Tschampion said GM would be satisfied if 25 percent of employees used it after one year and 40 percent did so over the long term.
Growing selection
In addition to Financial Engines, online service providers include mPower.com of San Francisco and Morningstar Inc. of Chicago.
Fidelity Investments also offers an online education and guidance service called PortfolioPlanner. On average, the services cost US$10 to US$20 a participant per year; the fees may be paid directly by employers or borne by the 401(k) plan. There are also substantial start-up costs, generally paid by employers.
After more than three years of stock market losses, and the collapse of investments in 401(k) plans at companies like Enron, many employees have said that they need investment help. But financial advisers and benefits consultants say the use of online advice is extremely low at many plans with which they are familiar.
"I'm negotiating with two companies who use either Financial Engines or mPower and their usage rates are in the single digits," said J.Michael Scarborough, the founder and chief executive of the Scarborough Group in Annapolis, Md. His advisory firm provides 401(k) advice to 11,000 people with retirement assets totaling US$1.5 billion.
Richard Koski, a principal at Buck Consultants, a benefits adviser to employers based in Manhattan, also said he had seen use in the single digits, adding that "the vast majority of the populace" did not use online advice.
While advice providers contend that their services are generally used more than this, they concur that a minority of employees have ever logged on to their services. Financial Engines, for example, says that in plans where its service has been available at least two years, 26 percent of participants have used it, up from 15 percent in the first year.
Access rates
A basic impediment is lack of access to the Internet. Among participants with online access, the rate rises to 43 percent after two years from 25 percent in the first year, according to Financial Engines.
"Am I satisfied with these numbers? No," said Jeff N. Maggioncalda, the chief executive of Financial Engines. He said he is convinced that "online will be the backbone delivery mechanism for advice for most American employees in five years."
At the moment, though, unfamiliarity with the Internet is commonly cited by employers and others as a reason people don't bother to go online for financial help. Other reasons include insufficient knowledge of investing and sheer lack of time.
Financial Engines and mPower say that it can take less than 10 minutes to get investment advice or a retirement forecast, although a more complete analysis requires more time. The advice includes suggestions on the percentage of salary to contribute to the 401(k) plan and asset-allocation and mutual fund recommendations.
Informed choices
People who use the services make better decisions, the online service providers say. Morning-star's participants have increased their contribution rates to 7.4 percent of their salary, on average, from 5.3 percent, making it more likely that they will save enough for retirement, said John Rekenthaler, the president of Morningstar Associates, the investment adviser subsidiary of Morningstar.
Allocations to company stock, which many experts consider too risky for retirement accounts, have declined 52 percent among those who have used Financial Engines, the company said.
For the most part, though, employees allocate assets when they sign up for a plan and never revisit their decisions, according to an analysis done two years ago by the Employee Benefit Research Institute.
"I don't think many people get much use out of online advice," said Robyn Credico, a senior consultant in Washington for Watson Wyatt Worldwide, a benefits consultant. "These services are too complicated and too time-consuming."
Some employers say their workers are uncomfortable making investment decisions over the Internet.
fear of failure
"People still are concerned they'll push the wrong button and the screen will go blank," said David Ausbrooks, vice president for operations at the Williamson Medical Center in Franklin, Tennessee, south of Nashville. Ausbrooks says that it is helpful to have an expert on hand to guide people through the Financial Engines program. But so far, only a minority of employees have signed up for this service. "I'm confident we'll increase participation over time," he said.
Melanie Miller, an investment manager at Hallmark Cards in Kansas City, Missori, has conducted 15 seminars for Hallmark employees since Jan. 28 as part of a companywide investment education effort.
"Every time you tell someone about Financial Engines, they say it sounds great," she said. "But then they tell you, `I haven't had the time, I don't know about investing, and I won't know how to do it once I get there.'"
After a series of lunchtime demonstrations of the online service, she said, the percentage of participants online has increased to 25 percent from 20 percent the last 18 months. "It's not where we want it to be," said Miller, although it is in line with industry experience.
"About 80 percent of participants would rather not think about their 401(k)," she said.
All the online service providers acknowledge that online advice isn't enough for most people. Fidelity, for example, uses a 1,000-employee telephone center to supplement its service.
"The beauty of online advice is you can see instantaneously whether you're going to meet your goal or not; the negative is, it's you and a machine," said Peter Smail, the president of the Fidelity Employer Services Co. "We actively promote PortfolioPlanner, but not as an exclusive advice mechanism."
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