Would you trust your retirement plan to an iron-jawed spaceman named Jake Starlight and a hound named Maggie? Morningstar hopes you will. The Chicago financial-research firm employs such cartoon characters as guides at its ClearFuture Web site, one of several sites offering advice on how to invest your 401(k) money.
At ClearFuture, your 401(k) plan is a spaceship and a secure retirement a bright but distant star. Jake Starlight and Maggie map your trajectory. Another site, Financial Engines, uses the weather as its guiding metaphor: The sunnier the "Forecast" logo is, the better the outlook for your golden years. The basic approach at these sites--which include those offered by mPower.com and Fidelity Investments--is the same. They ask for your age, salary, and intended retirement age. They hit you with questions that will help them determine your risk tolerance, or how much volatility you can stomach in your portfolio. Then they'll assess the investment options in your 401(k), and in the end, make recommendations as to what funds you should invest in and how much should be allocated to each.
These online advisers are attempting to harness the Internet to offer smart investment advice to the masses at a low cost. They prefer to sell the service wholesale to 401(k) sponsors, who in turn make it available to their employees. Still, if your company doesn't offer one, you can sign up as an individual at costs that range from $20 to $160 a year (table).
I tested four popular online advisory services and found the flight to Planet Golden Years took vastly different routes. This was startling since I fed essentially the same inputs into each.
To start, I made up a hypothetical 401(k) portfolio for a 30-year-old who's just getting started on retirement savings. The plan had 11 investment options: eight diversified stock funds, one bond fund, one money market fund, and his own company's stock, which fit in the technology category. The bond and money-market funds are not public funds, which is common in 401(k)s, so I told the service to calculate generic money-market and bond funds returns in their stead. This young saver had $1,000 invested in each of the plan's options plus $5,000 in the tech stock.
Large single-stock positions are also common in 401(k)s. That's because many companies match employee contributions with company stock and also because many employees feel more comfortable investing in the familiar--their employer--than in the stock market, which they don't fully understand.
ClearFuture was the easiest to use: a simple six-step process that took about 20 minutes. Jake and Maggie did most of the work, estimating my future salary and retirement benefits. After answering a few 401(k) questions, I picked a "flight plan": smooth, moderate, or bumpy. Jake's "Crash Test Simulation" graphed how much each allocation to stocks, bonds, and cash lost in past bear markets. Saying "yes" to "Are you ready for liftoff?" got me a plan: 65% stocks, 35% bonds overall. Specifically, increase my 6.6% in growth fund Putnam Voyager and "generic bond fund" to 33% and 32%, respectively.
A STEP UP. But ease of use isn't everything. Financial Engines makes users work harder, but its advice is more comprehensive. It designs an asset-allocation plan for every investment account, not just 401(k)s, and includes nonretirement goals such as financing your kids' educations. The site also stresses the probability of achieving each goal. So instead of a smooth or bumpy spaceship ride, you get a forecast. I had a 33% chance of achieving my retirement goal, which is unacceptable--and a storm cloud popped on the screen to say so.
In fact, Financial Engines keeps prompting you to make changes to get your probability of success above 50%. By trial and error, I kept boosting the annual 401(k) contribution--initially $4,500--until it reached $7,500. At that point, the odds of success hit 52%. That's also achievable by raising the retirement age or lowering the hoped-for retirement income.
Even though Financial Engines was dealing with the same investment options, its recommendations were different from Morningstar's. It suggested that Putnam Voyager stay at a 6.6% allocation while Westport Small Cap Fund be raised to 26%. For the company stock, Financial Engines offered a disclaimer: "We don't provide advice on buying or selling currently owned shares of certain investments, including stocks." So its weighting stayed at 33%.
Individual stocks are problematic at every 401(k) advice site, for business reasons. Would companies retain these advisory firms if they were going to tell people to sell the stock? "Many companies are concerned about a huge number of employees selling all of their company stock," says Financial Engines CEO Jeff Maggioncalda. Morningstar also has a disclaimer, but at least it warns about the risks of owning your employer's stock, providing an option to dump it from your portfolio.
GAPS AND GLITCHES. mPower solved the company-stock conflict by setting up a new 401(k) advice site for individual investors, mPower Personal Advisor. It is separate from its corporate mPower site and is now in beta testing. Personal Advisor told me to sell the company stock; the corporate site would not. Still, I was disappointed with the site because it crashed constantly and was missing crucial information on mutual-fund expense ratios and portfolio holdings. Hopefully, mPower will fix these problems before the final release.
Like Financial Engines, mPower advises on multiple accounts and goals, but its advice on taxable accounts is not tax-savvy. I told both Financial Engines and mPower that I owned shares in two funds and a stock, all at a cost of just $2 a share. Selling any of them would trigger huge capital-gains taxes, but mPower told me to dump them all. Financial Engines suggested getting rid of one of the holdings and warned me of the tax consequences.
I wasn't able to make an apples-to-apples comparison with Fidelity Investments' new Portfolio Planner. That's because the demo site uses default settings that a tester cannot change. But the Fidelity service has one tremendous feature the other sites lack: It aggregates the data for all of your financial accounts automatically--even those not at Fidelity. The site is more thorough, too, asking questions about state tax brackets, life expectancy, home value, and inheritance. That makes the initial set-up more time-consuming, but once that's done, you could get the most comprehensive online advice on how to make your golden years shine.
By Lewis Braham