COLUMN-Retirement savers go online for low-cost advice
By Mark Miller
CHICAGO, April 11 (Reuters) - Gary Zeiger could have used an investment adviser back in the 1990s. As a young techie at a software company, he got swept up in dot-com stock fever and lost two-thirds of his 401(k) portfolio when the bubble burst in 2000.
The remainder evaporated later, when a layoff forced him to tap the account to cover living expenses.
"It would have been beneficial if the company had some kind of financial planning or training back then," he says.
More than a decade later, few retirement savers are going for professional help. The 2013 Retirement Confidence Survey released by the Employee Benefit Research Institute found just 23 percent of workers had obtained investment advice.
The cost of advice is often a turn-off, and few advisers are eager to sign up clients with small account balances. As an alternative, many savers, including an older and wiser Zeiger, are turning to websites that offer low-cost investment guidance.
Now 47, Zeiger works at the Jacksonville, Florida, campus of the renowned Mayo Clinic, where he's been an information technology professional for the past five years. He's been rebuilding his retirement savings, with $44,000 salted away in Mayo's 403(b) plan.
Zeiger is using FutureAdvisor, a free online service that accesses his accounts online, analyzes the investment choices and makes recommendations for adjusting his portfolio and following up with quarterly rebalancing.
Zeiger's wife Tonya, who also works at Mayo Clinic, has about $80,000 saved, and they have implemented FutureAdvisor for her portfolio, too. The Zeigers also will benefit from Mayo's defined benefit plan, which will generate $4,800 in monthly income if they both retire at 65 years of age.
The advice they are getting includes asset allocation recommendations for all their plans - legacy workplace plans, Individual Retirement Accounts and taxable accounts.
FutureAdvisor is one of several services available on the Web, including MarketRiders and JemStep, that offer advice but don't directly handle assets. There are others that can manage non-workplace account assets directly, like Wealthfront, Betterment or Personal Capital.
These services cut through the complexity of retirement investing by focusing on the two most important success factors: expense and asset allocation.
Investors often assume that stock or mutual-fund picking drives outcomes, but professionals will tell you that allocation is far more important. Balancing your portfolio appropriately between equities, fixed income and cash investments to match your goals, tolerance for risk, and investment time horizon.
Fees also are critical. A Morningstar study published in 2010 found that fees trumped even its own vaunted star rating system as a predictor of success; low-cost funds reviewed by Morningstar had much better returns than high cost funds across every asset class over a five-year period.
In the Mayo Clinic 403(b) plan, Zeiger must navigate a long list of more than 50 fund choices - everything from rock-bottom cost index funds to expensive actively-managed funds. Employees also are automatically enrolled to receive advisory services from Financial Engines - a major player in third-party advice for workplace plans - unless they specifically opt out.
Two-thirds of Mayo Clinic employees are using Financial Engines, typically paying an annual fee of 0.03 percent of the holdings, says Frank Allen, an in-house financial adviser at Mayo Clinic.
Since Financial Engines typically steers workers toward low-cost index funds, the average employee fund expense is 0.33 percent, he says - for a respectable total cost of 0.66 percent a year.
Zeiger opted out, choosing to push his costs down further still by using the free FutureAdvisor service. He currently has 66 percent of his portfolio in low-cost, large-cap domestic and foreign funds; 12 percent in emerging market funds; 15 percent in real estate investment trust funds (REITS), and the remainder in bond funds. His total expense on the funds he holds is just 0.21 percent.
The difference between that and the Mayo Clinic average may sound small, but paying those fees regularly - quarter after quarter - adds up to real money.
A 2006 report to Congress by the U.S. Government Accountability Office found that a 1 percentage point increase in fees reduced return over a 20-year period on a typical portfolio by 17 percent.
In Zeiger's case, a rough calculation shows that cutting expenses from 0.66 to 0.21 percent could generate $15,000 in additional assets at retirement, assuming that he continues his current practice of contributing 6 percent of salary, and earns an average annual market return of 4 percent.
Although he's used FutureAdvisor for just a year, Zeiger likes what he sees, so far. "The market has been a rollercoaster and so have my funds, but they follow the Dow - sometimes I'm up, sometimes I'm down."