Original robo-adviser Financial Engines seeks life beyond 401(k)s

NEW YORK (Reuters) - Long before the phrase "robo-adviser" existed, Sunnyvale, California-based Financial Engines was cornering the untapped 401(k) plan market with computer simulations to help people save for retirement.

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.

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)