Dear Mr. Market:

If you were asked to list two or three of the largest Registered Investment Advisory (RIA) firms in the country which ones would come to mind first? You’d definitely hear many of the names associated with Wall Street and the investment industry. Names like: Merrill Lynch, Charles Schwab, Fidelity and Wells Fargo – while these are certainly large firms none of them are RIA’s. We’ve written on several occasions what an RIA is and how they are driven by their fiduciary responsibility to their clients. A simple online search of RIA’s will show that the largest firm is nearly 40% larger than any its closest competitor. It specializes in assisting individuals in managing their company retirement accounts and has become a behemoth in the investment industry. Financial Engines, Inc. has risen out of relative obscurity and is quickly becoming a household name.

Financial Engines is based out of Sunnyvale, CA, is publicly traded under the ticker symbol FNGN, and currently manages over $90 billion in assets! To put this in perspective the second largest RIA firm is Fisher Investments with assets under management of just over $50 billion. Fisher Investments is a marketing machine and if you have a portfolio over $500,000 in value, you’ve most likely received one of their post card mailings or solicitation emails.

Financial Engines, on the other hand, is a relatively young company and is the creation of some of the brightest minds in the industry that made their mark in the late 1990’s. The founders of the firm are Nobel Prize winning economist William Sharpe, Stanford Law Professor Joseph Grundfest, Attorney Craig Johnson and Jeff Maggioncalda. While the firm went through some minor growing pains, they have certainly found their target market – working with individuals and managing the investments in their company retirement plans.

Currently Financial Engines works with over 550 companies throughout the United States which results in over 800,000 individual accounts. Among the larger and more well-known companies that have hired Financial Engines to assist their employees are: Dow Corning, Alcoa, Ford, IBM, Microsoft and Dell. According to their website a total of over 9 million people have access to their services! In less than 20 years Financial Engines has gone from an idea to the largest RIA in the country! With such impressive growth we wanted to know if Financial Engines’ services will help make your retirement dreams a reality?

The advice that Financial Engines offers to its customers is based on Modern Portfolio Theory which attempts to deliver the best return based on the risk that the individual is willing to accept. They run thousands of different scenarios called Monte Carlo simulations to illustrate how different portfolios will perform over time and ultimately how much the client will have when they need to tap into the account in retirement. Individuals that hire Financial Engines to manage their retirement plan assets pay around 0.5% annually (varies based on the relationship with the plan provider), this is in addition to any fees associated with the investment options provided within the plan. Financial Engines offers different levels of assistance depending on what the clients needs are.   Services are delivered through call centers and attempt to meet the needs of individuals through three different models:

• Professional Management – Offers ongoing monitoring and supervision of accounts. Using an investment model a plan is developed and then Financial Engines will make changes and provide participants with a quarterly summary.
• Online Advice – Provides individuals with recommendations and portfolio models. The participant is responsible for making changes and monitoring the account.
• Income Plus – Designed for individuals that are looking to access their funds in retirement. Annuities are used as a solution to individuals as part of this service. Be mindful of what annuities are and if they should even play a part in your portfolio. Annuities are often a very expensive option that can completely negate what initially appears as solid investment advice.

Financial Engines’ growth can be partly attributed to the simple fact that they found a need and created the products and services to meet it. Over the last several years the firm has seen tremendous growth. In 2013 alone revenue rose 29% to $239 million! As defined benefit retirement plans are becoming a thing of the past for the majority of Americans it is vital that company retirement plans are managed effectively. Studies have shown that individuals that get professional assistance with their investments on average get a return that is 3.3% higher than those that get no advice. The average American deposits funds automatically into their retirement plan with little or no regard for where those funds are actually invested in the account. For most individuals their retirement plan is their second largest asset to their home – when you put that in perspective it is shocking that these assets are often completely neglected. According to David Wray, President of the Profit Sharing/401(k) Council of America, “About 85% of retirement plan participants make no asset allocation changes during the year.”

For the individual that simply files away their quarterly 401(k) statements without viewing them, a service like Financial Engines could be an ideal fit. Having another set of eyes viewing your account and giving you suggestions on allocation adjustments will have a profound impact over doing nothing. However, if an individual simply takes the suggestions and files them away along with their statements then they’ve done nothing more than expose their account to another layer of fees which will only have a negative impact on a long-term basis. Individuals need to be honest with themselves and how active they want to be in the management of their retirement accounts and then pick the level of service that is appropriate to them. It reminds us of the popular saying we have all heard, “you can lead a horse to water but you can’t make it drink.” A firm like Financial Engines can have all the bells and whistles that investors are looking for but if they are not going to implement them they will do nothing. So if you find yourself in this camp what are your options to get your retirement assets working for you?

There are several different options to consider with your retirement plan:

• Buy a Target Dated fund – if you know you will not look at your account then these are an option. The majority of plans offer a variety of these funds allowing you to pick a fund with a date close to when you plan to retire. These funds will rebalance on a set schedule and become more conservative as you near retirement. There is no active management based on the market or economic environment, all changes are driven by dates on the calendar.
• Buy low-cost index funds offered within your plan. Every plan will offer index funds that essentially allow your portfolio to follow the broad markets. Fund families like Vanguard offer these funds with a cost basis typically under .20%.
• One option to not consider…. Doing nothing! Unfortunately this is what most individuals do within their retirement plan and just blindly assume that the funds will be available for them when they are ready to retire. According to USA Today, 60% of employees have less than $25,000 saved for retirement…this will only ensure one thing – retirement will not be a reality.
• Lastly, if you’re of the mindset that bigger is not always better or that factory type solutions are fine for making cars but not managing your personal investments…there is a more customized option. You don’t deserve to be a number or wait for the ‘next available representative’ as you sit on hold over the phone. Consider learning about Total Portfolio Guide which is a competitive service for retirement plan management at fractions of the cost of Financial Services but with far more personal attention and customization.

A Forbes survey stated that 1/3 of middle-aged Americans now feel that they will have to work until they are 80 to retire comfortably. For those that are saving and funding their retirement plans this doesn’t need to be the case. Take the time to ensure that you are on track and more importantly that your funds are working for you as hard as you do to make the monthly contributions. As Benjamin Franklin once said, “If you fail to plan, you are planning to fail!”