The DoL "in effect validated our business model," says Chris Covill, president of Annapolis, Maryland-based Scarborough Retirement Services. As a result, Scarborough is expanding its 13-year-old business of advising on and managing 401(k) assets on a retail basis into the corporate market, with several plan sponsors now joining its nearly 10,000 retail clients. Morningstar Inc. is planning to roll out a similar offering to current and new clients in first-quarter 2003. "We've had online advice products for a while, but the reality is they help a minority of investors," says Mike Skinner, vice president of Morningstar Associates, a unit of Morningstar. "We see [managed plans] as a logical next step — and our customers are asking for it." Internet-based advice provider Financial Engines is considering a similar move.

Seminars Don't Work
ProManage, which has grown to about $100 million under management from six clients in its four years of operation, says its approach is based on the premise in the ERISA legislation that plan sponsors have a responsibility for investing plan assets. Section 405d allows an employer to transfer its investment responsibilities to a professional manager, and that also applies to the assets of all employees who stay in the plan, says Londe. Employees must be able to opt out, but if they do, they effectively relieve their fiduciary of responsibility, as long as it has satisfied all the other requirements of ERISA's Section 404c.

"It's a ground that has not been tested, but if you have an investment team in there making well-reasoned decisions and they are made in the best interest of the participants, I don't think they would have liability," says Tina McKnight, general counsel for Magnetek. And CFO Reiland says the fees associated with the service were less than the lifestyle funds offered in the previous plan, putting the price in what he considered to be a reasonable range.

A benefit of these management services, vendors point out, is that they can eliminate any real or perceived conflicts of interest involving company stock ownership in a plan. Company-sponsored plans "have a fiduciary risk, even if you let people transfer in and out freely, because you can't advise employees in any way, shape, or form to help them reduce their exposure to it," says Covill. But a third-party investment adviser, with no bias toward or against company shares, is more likely to include them in optimal quantities.

Professional management may have a particular attraction in light of the difficulty that plan sponsors have had using education to combat investor inertia and irrationality. Generic seminars often have little impact on actual behavior, says Brigitte Madrian, an economics professor at the University of Chicago Graduate School of Business. Tracking one large company's employees after their investment-education sessions in 2000, she found the seminars prompted little action at all. While 28 percent said in postseminar surveys that they wanted to increase their overall plan-contribution rate, only 8 percent actually did. And while nearly half walked out intending to change their allocations, only 15 percent did. "I think it's an out-of-sight, out-of-mind phenomenon," says Madrian.

Getting Personal
More companies, of course, are trying to personalize advice these days, using Internet-based services like Financial Engines or mPower. But for the most part, "the advice that's out there now prominently is not one-on-one, which I think is what people are seeking," says Bill Daniels, a senior consultant at Towers Perrin. True in-office personalized advice is expensive, notes Daniels, running about $250 to $300 more per person than the $25 to $50 annual cost of computer-generated advice.

Still, with the price of advice likely to drop as more plan providers bundle it into their offerings, some companies may want to offer both online and personal advice. "Individual advice means you can look more comprehensively at individual asset situations, like spouses' benefits and trust funds," Ferrigno points out.

Some companies even see it as their duty to offer advice to employees. Dow Corning, for example, paid out of its own coffers to give all employees access to an Internet-based tool from Financial Engines last year, and has managed to convince about 50 percent of them to use it. "Knowing the visibility the analysis provides into assets, I thought it would be a valuable education process, even if our employees didn't ultimately use the advice," says Dennis Hurley, head of Dow Corning's pension investment and risk management.

Hallmark Cards Inc., the Kansas City, Missouri, greeting-card company, has provided employee investment advice through Financial Engines since 1999. It is looking at adding the option of managed plans, although it wants the service to mature first.

"We want to make sure that there's a business model we like and believe in. And right now that service is so new, it's a model we want to watch and see," says Melanie Miller, investment manager in Hallmark's benefits trust department. "We definitely believe there would be employee interest in those services; we just want to make sure [we choose] the right one."

A big question, of course, is whether the investment strategies of professional management will translate into fatter retirement funds. And in that connection, so far there are few good answers. Magnetek is benchmarking ProManage's performance against a weighted average of several indexes.

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