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 With the first wave of baby boomers now retiring, the company is
reaching a critical moment: Its core customers, who have been
accessing its advice through company 401(k) plans, will soon be off
on their own. To hang onto those investors - and find others -
Financial Engines is planning to go up against other so-called "robo-advisers,"
companies that use software programs to provide financial advice,
and offer advice outside the 401(k) market.
"We do see substantial opportunities beyond the workplace to help
investors," Christopher Jones, chief investment officer, told
Reuters. "Could we end up competing against the robo-advisers?
Absolutely."
With this challenge in mind, Financial Engines, which serves
corporate retirement plans from companies including Delta Air Lines
to Microsoft to Xerox, is discussing ways to offer retirement
savings advice and management to the families and friends of the 8.9
million employees at the companies it serves, Jones said.
Concerns about the low enrollment rates in Financial Engines'
money-management service, along with rising costs helped push shares
down 45 percent in 2014.
"They are clearly the 800 pound gorilla in the 401(k) space, but the
question is, how do they get more people to use the service" said
Martin Schmidt of H2Solutions, a Wheaton, Illinois-based consultant
for 401(k) plans. "As the baby boomers retire, that is going to be a
bigger challenge."
Meanwhile, a growing number of robo-adviser upstarts like
WealthFront and Betterment, as well as more traditional brokerage
firms, such as Charles Schwab Corp, are spending heavily to convince
soon-to-be retirees to move their retirement savings into individual
retirement accounts with them. In 2013, investors rolled $324
billion from 401(k) accounts into the $6.5 trillion IRA market,
according to Cerulli.
"That's where the end of the rainbow is for advisers and all of
these providers," Schmidt said. "Everyone is vying for those
dollars."
Recognizing the demographic changes, the company, which has been
serving the $4.2 trillion 401(k) market for 19 years, has been
ramping up its offerings to retirees and soon-to-be retirees in
recent years, trying to keep them from moving money out of their
401(k) plans.
In 2011, the firm introduced its Income+ service which lets retirees
receive monthly payouts from their retirement savings and buy an
annuity if they choose. Jones said he believes that this generation,
the first to really use 401(k) plans, may keep those accounts
intact.
Financial Engines more recently has added services to help investors
manage Social Security payments as well transition their money into
an IRA.
However, it remains unclear how many employees will actually pay
Financial Engines to manage their money in retirement.
"Obviously we would like to have more people using our service,"
Jones said.
A 2014 study by Aon Hewitt found that the average retirement plan
participant who used online advice or another form of managed
account reaped annual returns that were 3.3 percent higher than
those who did not, even after the higher fees were taken into
account. At that rate, the savings of a 45-year-old who turned to
online help would be 79 percent greater than a co-worker who did not
by the age of 65. These returns apply to all online advice use, not
just Financial Engine’s.
KEEPING RETIREES
The stakes are high. With baby boomers expected to retire at a pace
of 10,000 a day for 14 years, 2016 is on track to be the first year
that 401(k) plans will have greater outflows of money than inflows,
according to Cerulli Associates. Investors are expected to take $366
billion out of their 401(k) plans next year, while only put in $364
billion into their plans, a trend that will accelerate in coming
years.
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That the company is focusing on improving enrollment rates by adding
more personalization and increasing its web and social media
presence could push its shares to $50, said Mose Katri, an analyst
at Cowen and Company, who has an outperform rating on the shares.
Shares of the company closed up more than 1 percent Tuesday at
$42.55.
Financial Engines serves 146 of the Fortune 500 companies and has
relationships with many of the largest record-keeping platforms that
serve 401(k) plans. Wells Fargo will soon announce a deal with the
company that will make its online advice available to the 3.8
million 401(k) participants on its 401(k) record-keeping platform.
While the firm currently has the advantage of a captive audience
with all of the employees at the companies it signs up as clients,
it will be tougher if it starts direct marketing to investors, said
Bob Napoli, an analyst at William Blair. "Going at it one by one is
harder."
That drawdown from 401(k) plans will potentially reduce the amount
of assets that Financial Engines can manage and levy fees.
Financial Engines charges investors 0.20 to 0.60 percent of their
assets annually to manage their money, while WealthFront charges
nothing for investors with less than $10,000 in assets, and 0.25
percent for investors with more than $10,000.
Today, fewer than 10 percent of plan participants let Financial
Engines assume the more lucrative business of managing their assets,
rather than simply getting the free advice paid for by the plan
sponsor. While 8.9 million plan participants have access to the
company's money management services, only 869,000 use it.
"That's a tiny sliver of their potential," said Michael Baron, a
vice president at New York-based fund manager Baron Capital, which
owns about 4.8 million shares of Financial Engines. "We think that
their enrollment rates are artificially low because they've been
signing up these very large plans, and it takes time to get the
enrollment figures up" toward approximately 20 percent, he said.
Revenues for the company's professional management service, which
accounted for 90 percent of the company's revenue in the first
quarter, rose 17 percent in its most recent quarter compared with
the year before, accelerating from 15 percent year-over-year growth
in the prior quarter.
The employees that do sign up for the management service show "very
little attrition," said Sandy Villere, who recently began adding
shares of the company to the line of Villere funds he co-manages.
"It's just software, but it works."
(Reporting By Jessica Toonkel. Editing by David Gaffen and John
Pickering)
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