Both Credit Suisse Asset Management and Merrill Lynch have chosen 401(k) partners to give Internet-based investment advice and guidance to participants of 401(k) plans for which Merrill and Credit Suisse provide management services.
Both partnerships, announced last week, underscore the desire of asset managers to provide personalized investment advisory services to 401(k) participants through the use of independent and objective third-parties.
Credit Suisse of New York has allied with 401(k) Forum, a registered investment advisor in San Francisco to offer advice to Credit Suisse's Fortune 500 defined contribution clients. Over the next two months, Credit Suisse will offer plan sponsors the option of allowing employees to gain access to retirement plan investment information and personalized advice through an Internet connection to the 401(k) Forum. The firm will build individualized websites for each plan sponsor. For example, calculators could be preprogrammed to take matching contributions into account.
Plan participants will then be able to gain access to the site directly from their home or office PCs or through an employer's Intranet connection. Sites will be encrypted and password-protected.
Credit Suisse will include the service as part of its bundled 401(k) package to large plan sponsors, the market segment on which Credit Suisse has chosen to focus its efforts.
Specific fund recommendations will not be given. The online service will provide direction for employees who are faced with many funds, not just Credit Suisse or Warburg Pincus funds.
Credit Suisse will also have the opportunity to add its own investment strategy commentaries to that of the independent advisor.
The alliance with 401(k) Forum was precipitated by three major trends, said Robert Birnbaum, managing director of defined contribution plan business for Credit Suisse. The first is the growing need for participant education, guidance and counseling. Investors need help with everything from gaining a basic understanding of the need to save for retirement to learning about risk tolerance, investment options and more sophisticated asset allocation strategies.
Also, the once obvious chasm between institutional and retail money management is closing. Individual investors are exploring exotic strategies once employed by only well-heeled institutional investors. Investors need advice to make sense of these exotic strategies.
Finally, the Internet is enabling investors to gain access to ever more information easily. Investors need advice to sift through and organize all this information.
The move to enlist the investment advice of outside advisors arises from plan sponsors' desires to provide highly individualized retirement plan counseling and recommendations without being liable for that advice.
"Plan sponsors are concerned with how to help employees get to a secure retirement," said David Peckman, vice president of marketing for 401(k) Forum.
The need to provide investment guidance has been a topic of concern among plan sponsors as they look to their fiduciary responsibilities. One of the many questions raised has been just how detailed the information provided in retirement plan education needs to be.
Peckman said the beauty of an online advisory offering is that individuals can delve down as deeply as they want.
"The objective is to build the sites to reach across the varying levels of individuals and answer their questions," he said. "But for individuals who want more, we allow them to go deeper on mutual funds or plan features. We anticipate the needs of more mature investors."
One important feature of the individually-tailored service allows participants to save all entered information so they can pick up where they left off at a later date, or reconsider a possible investment scenario.
Merrill Lynch announced its plans to ally with online investment advisor Financial Engines of Palo Alto, Calif. on the same day Credit Suisse announced its collaboration. Merrill will provide access to the online advisory service, Financial Engines Investment Advisor, for its 18,000 plan sponsors through an initiative called Merrill Lynch Bene OnLine. Merrill has 3.2 million defined contribution plan participants in small, medium, large and "jumbo" defined contribution plans. Among Merrill's "jumbo" customers is Wal-Mart, the nation's largest employer, said Wendell Wood Collins, a Merrill spokesperson.
Financial Engines has a very well-known conductor in its engine room. Firm founder William Sharpe, a Nobel laureate in economics and creator of the Sharpe Ratio, a risk-adjusted performance measurement tool, founded the service.
The Financial Engines program costs between $20 and $60 per participant per year. Deciding who pays these costs will be up to each plan sponsor, said Collins. Some sponsors will pay these fees, others will split the cost with employees and others will ask participants to pay through payroll deductions, she said.
Merrill chose to ally rather than develop its own 401(k) advisor in part to have one available as soon as possible and to save money, said Collins.
"We looked at developing our own solution," she said. "We didn't know if we could duplicate (other programs)." And, Merrill recognized it was a vital service needed in the marketplace right away.
"People are fairly clueless with what to do," Collins said.
In a study conducted in April, Merrill found that more employers than ever are using technology to communicate benefit information to employees via 800 numbers, intra/internet web sites, e-mail and video/audio tapes. (see chart page 34). It also found that of those companies that do not now offer information online, 20 percent would be inclined to do so in conjunction with online retirement plan advice and guidance for plan participants.
Online 401(k) advisory services can even thrive offline. In September 1998, State Street Global Advisors of Boston formed an alliance to use the Financial Engines technology for its plan sponsors. Many of the firm's 200 plan sponsors are still mulling whether to employ the online technology. Meanwhile, State Street has been using Financial Engine's online investment capabilities with about a dozen of its 160 internal advisors, said Ray Martin, principal SSgA Retirement Investment Services.
Through the use of the Financial Engines program, reps in contact with plan participants by phone are armed with consistent and objective advice, Martin said. So far, SSgA has two plan sponsors signed up to provide participants with Financial Engines' retirement planning analysis and advice by telephone.
But Martin expects to see the acceptance of online advisory services for retirement plan participants grow in the near future just as self-directed brokerage accounts in retirement plans have gained favor in the past five years.