Engines firm to rev up with managing IRAS

Financial Engines of Sunnyvale, which grew to be one of the nation’s largest independent financial advisers by managing employees’ 401(k) plans, announced Wednesday that it is moving into an even larger market — individual retirement accounts.

When the company started 17 years ago, it provided advice to employees about their 401(k) plans. Workers whose employers had signed up with Financial Engines could log into their accounts and answer some questions about themselves, and the program would tell them how to allocate their money among the various investment options.

“We realized in the early 2000s that a lot of

people don’t want to be taught what to do or told what to do. They just wanted someone to do it for them,” says Jeffrey Maggioncalda, the company’s chief executive officer. Although it still offers advice, the original business never gained much traction.

So in 2004, the company began managing 401(k) accounts for a fee that is now about 0.5 percent of account assets per year. For no additional fee, clients can also get advice about IRAs they or their spouse hold outside the 401(k) plan. Last year this managed account business represented 81 percent of the company’s $186 million in revenues. At the end of the first quarter it had $70.8 billion under management.

More than 500 mostly large employers offer Financial Engines, including Hallmark, Levi Strauss and PG&E Corp. At companies where Financial Engines offers managed accounts, about 10 percent of 401(k) participants use it.

With many of its clients nearing retirement and thinking about rolling 401(k) accounts into IRAs, where they have more investment options, it was only natural that Financial Engines would expand into the IRA business. “We are doing this because it’s what our customers are asking us for,” Maggioncalda says.

Under the new program, clients can roll a 401(k) account into an IRA at Charles Schwab or TD Ameritrade, and Financial Engines will manage it using funds available on the two brokerage firms’ no-transaction-fee platforms. The fee will generally range from 0.5 to 0.75 percent a year depending on account size. Clients will not have the option of owning individual stocks or exchange-traded funds in these accounts, although they can be held in other accounts and Financial Engines will provide advice.

Making the rollover will be easy for clients whose 401(k) account is held at Schwab or Ameritrade, but rolling a 401(k) from one firm to an IRA at another takes more time and paperwork. Financial Engines hopes to make the transition easier by adding more firms where it can manage IRAs.

New rules expected

The move comes at a time when the government is concerned about the advice people are getting about their IRAs. In a report issued last month, the General Accounting Office said many employees who leave a job are pushed by financial services companies into rolling their 401(k) account into an IRA, whether or not that is their best option.

To reduce conflicts of interest, the Department of Labor is expected to issue new rules this summer that would require people who offer IRA advice to provide it in the role of a fiduciary, meaning they always put their client’s interest ahead of their own. Many IRA advisers are brokers, who are held to a lesser standard.

Financial Engines, as a registered investment adviser that doesn’t sell products or hold accounts, would be well positioned to benefit from such changes.

The IRA market “is a natural extension of what they have been doing. I think they have the right infrastructure in place to penetrate the market,” says Jon Chambers, a principal with Schultz Collins Lawson Chambers, an investment advisory firm.

Target-date funds

The move into IRAs, which started on a limited basis a few months ago, also comes at time when Financial Engines’ core product is being threatened by target-date funds. These funds contain a mix of diversified stock and bond funds geared toward the investor’s expected retirement date. As the date gets closer, the mix gradually becomes more conservative, with fewer stocks and more bonds. Depending on the cost and quality of the underlying funds, they can be a simple solution for people who don’t want to manage their own money.

These funds have become a popular staple in 401(k) plans since the Pension Protection Act of 2006 said employers could use them as a default investment for employees.

“Financial Engines is sort of competing more with a target-date fund than any other company,” says Mike Alfred, chief executive of BrightScope, which tracks and rates 401(k) plans.

Financial Engines went public in March 2010 and its stock is up 227 percent since then, compared to 41 percent for the Standard & Poor’s 500 index. But “they are a public company now and they will be under increasing pressure to find new growth,” Alfred says.

The IRA market is bigger than the 401(k) market, and most of the money in IRAs came from 401(k) plans. “It’s a huge market that right now they are not getting,” Alfred says.

But as the Baby Boom generation retires, there will be lots of competition for IRA rollovers, and Financial Engines is just one of many companies — old and new — that will be vying for a piece of it.