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Empowering Defined Contribution Plan Participants:
Gauging the Impact of Advice Services

Making investment advice available to participants in defined contribution plans can lead them to rethink how much of their retirement money they're allocating to stable value funds. But early evidence suggests the changes won't always be dramatic.

Consider the experience of the Air Line Pilots Association and Hallmark Cards. In June 1999, ALPA began making investment advice available to its employees via Financial Engines, one of several firms that have cropped up in the past few years to counsel workers on retirement investing. A few months later, Hallmark did the same thing for participants in its 401(k) plan.

One year later, changes in the ALPA plan were fairly significant. Participants were now steering about 32% of their 401(k) contributions to the plan's stable value fund, down from 45% prior to bringing Financial Engines into the picture. At Hallmark, though, allocations to that plan's stable value fund barely changed, declining modestly to 26% from 28%.

The conclusion, attendees at the Stable Value Investment Association's 2000 National Forum learned, is that factors unique to an individual plan will significantly affect the degree to which advice services impact asset allocation decisions. In Hallmark's case, Investment Manager Michael Melcher said, there were three reasons why plan participants might not have made dramatic changes to their stable value allocations.

"First, only about 10% of our participants actually used Financial Engines' advice service in the first year it was available," Melcher explained. "Secondly, a significant portion of the stable value assets in our fund are held in retiree accounts, and retirees don't have access to the advice service. Finally, for many of our employees, the bulk of their net worth is held outside of our company's 401(k) plan, so making changes to their asset allocation strategy within that plan doesn't dramatically affect their probability of reaching their retirement goals. (Hallmark operates a profit-sharing plan that is approximately three times larger than its 401(k) plan.)

At ALPA, by contrast, Financial Engines found quite a different employee population and a different set of circumstances. For starters, the labor union's 420 U.S. employees are highly compensated on average, and that work force includes a high concentration of workers in their mid to late 50s. A fair number of them had 100% of their 401(k) assets in the plan's stable value fund.

Also, ALPA had hired Fidelity Investments to take over the plan's management just before bringing Financial Engines aboard. While Fidelity kept the plan's previous stable value fund (a CIGNA offering), it also expanded the number of investment options available to plan participants to 21 funds and a brokerage account.

"The way I see it, Fidelity offered more choices, and that helped to the put the stable value fund into a different perspective," Matthew Szlapak, head of benefits at ALPA said. "It wasn't necessarily a negative perspective, but the new allocation patterns do seem to me to be more logical. They suggest that the Financial Engines advice was working, in that it essentially asked some employees, "What are you doing with all of your eggs in one basket?"

Even with the changes, Szlapak said, 85 participants in the plan, or approximately 20% of the total work force, still have all of their money in the plan's stable value fund. Most of those people, he said, are in the 51-to 60-age bracket.

"It's also important to note that while new elections to the stable value fund did decline, there was no existing money movement," Szlapak added. "By that, I mean that few participants took money that was already in the stable value fund and moved it into another investment option."

Read Next: mPower and Financial Engines: Comparing and Contrasting Two Advice Providers