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."
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