Financial Engines Helps Employees Manage 401(k)Plans

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In an age of volatile financial markets and uncertain retirement benefits, programs such as Income+ fromFinancial Engines ( FNGN ) are a welcome helping hand.

The Silicon Valley-based Financial Engines has been an innovator in the retirement space. More specifically, the company focuses on 401(k) plans to help employees manage their investments.

It launched Income+ in early 2011 to help near-retirees transition into retirement without the worry of how to structure their accumulated 401(k) savings. While helping to protect participants from large losses before retirement, Income+ can provide steady monthly payouts for the remainder of one's life.

"Everybody retires when they hit 65. Most people take their 401(k) and they withdraw the money and then they buy an annuity or they do something with that money, such as putting it in a brokerage account or spending it," said Michael Grondahl, an analyst at Piper Jaffray.

"Income+ is designed (so) your money stays in the 401(k). And if you want to design a low-cost annuity, it will help you plan that. And you don't have to buy an expensive annuity that you're locked into for the next 10 years," he said. "You can change with Income+ every month if you want."

So far, 50 companies with $79 billion in retirement plan assets and 900,000 employees have decided to offer Income+.

Live Adviser

In addition to various strategies that retirees or near-retirees have available, they also have access to a live adviser who can help them structure their overall retirement income picture.

"We're using a concept called liability-driven investing, which means we're trying to structure a portfolio that will meet your liabilities, in this case a stream of income that doesn't go down, in all future states of the market," said Christopher Jones, executive VP and chief investment officer at Financial Engines.

"So if interest rates go up or down, if the market goes up or down, you'll be able to draw upon that stream of income. What's nice about this ... you have full flexibility and access to your money," he added.

While Income+ is the latest of their products, Financial Engines has been in the retirement space since its inception in 1996.

Co-founded by Nobel Prize winner Bill Sharpe, the company's vision has been to leverage technology in order to provide affordable investment management to people regardless of their wealth status.

Today, Financial Engines is the largest independent registered investment adviser managing retirement assets for about 500 plan sponsors representing over $500 billion in assets and over 9 million individuals. The average 401(k) client has $90,000 in his account.

"What's unique about Financial Engines is that we have really come up with technologies and processes that allow us to change the scale of economics of providing investment advice," said Jones. "We can provide very high-quality, personalized, objective, independent investment advice, but do it at a cost that's much lower than the traditional cost of working with a highly paid expert in a face-to-face kind of interaction. And that allows us to serve the needs of people who don't have very much in the way of financial assets."

Financial Engines has been very successful at going after large employers. It currently has contracts with 140 of the Fortune 500 companies.

It offers two services for regular management of the 401(k) plan. The online service is designed for people who want to be hands-on in managing their 401(k) investments. Financial Engines helps them put together a personalized retirement plan. The employee can then make adjustments as his tolerance for risk or other factors changes. The fee for this plan is usually paid by the employer.

"It's designed to be used by the participants themselves," said Jones. "They can change various assumptions. They can change various parameters, and they can update their retirement plan."

The second service is professional management of the assets in the 401(k) plan. Here, people delegate their responsibility of managing their investments to Financial Engines. At the end of last quarter, Financial Engines managed nearly $62 billion in assets for 650,000 participants in this category.

Once the personalized retirement plan has been created and agreed upon by the employee, the company takes over the management of the portfolio. It then makes appropriate changes on an ongoing basis as the market or the circumstances change.

"What professional management offers is free and unlimited access to online advisers," said Jones. "And our advisers are Financial Engines' employees, they're not commissioned in any way. So they're able to provide objective assistance to people to help them think through retirement planning decisions, to help them understand how they might want to bring together various parts of their household portfolio and to make informed decisions about things like risk, downside protection and the like."

The annual fee for this service ranges from 0.2% to 0.6% of the total assets. Larger accounts typically have lower fees.

Adviser Access

"One of the nice things about the service is if you have $5,000 in your account, you have the same access to the advisers as somebody who has $250,000 in their account," added Jones. "That access to a human being is really helpful, particularly for people who are a little older."

Demographics play an important role for the company. As 78 million baby boomers reach retirement age, many are entering uncharted territory when it comes to decisions about their retirement savings.

"You have a very large audience of people concerned about their retirement, looking for advice and help on how to prepare for it," said Grondahl.

With demographics being such a strong driver, the company is also actively exploring the IRA market.

"If they can design something that brings that asset allocation and diversification expertise to the IRA market, it's potentially a nice growth vehicle," said Grondahl.

Competition in the market in which Financial Engines operates is rather fragmented. There are a few, much smaller players trying to tap the market.

In addition, some of the largest 401(k) providers also carry the company's services via an outsourced model. Those include Fidelity Investments,ING ( ING ),JPMorgan Chase ( JPM ), T. Rowe Price and Vanguard.

"They really are the clear market leader," noted Grondahl. "They kind of got an early lead. And with that early lead, it was really hard for others to get there."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
Referenced Symbols: FNGN , ING , JPM

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