The idea of offering online investment advice to its 401(k) participants grabbed 3Com Corp. from the moment it was frrst suggested two years ago. For one thing, there was the appeal of the exciting little start-up that was behind the proposal — Financial Engines Inc. The company was founded by two prominent Stanford University professors in Palo Alto, California — close to 3Com’s own Santa Clara headquarters — who seemed unusually suited for such an enterprise. Nobel laureate economist Bill Sharpe had devoted much of his career to simulating how investments might perform over time for institutional investors. And Joe Grundfest, a Stanford law professor, was a former commissioner with the Securities and Exchange Commission.
For another thing, the Web-based product had special appeal for a company like 3Com — maker of the Palm Pilot and networking gear — whose nearly 12,000 employees have a high level of personal Internet access. Finally, 3Com discovered that “we were one of the pioneers” considering Internet-based 401(k) investment advice for employees, says 3Com vice president and corporate treasurer Art Taylor.
Out of a quarter-million plans covering 31 million employees, fewer than 100 plans, with as many as a million participants, now include an online-advice benefit, according to Forrester Research Inc., of Cambridge, Massachusetts. Because of the “war for talent here in Silicon Valley,” Taylor notes, useful new benefits can have appeal as competitive ammunition. And the benefits with the greatest appeal are those that, as in the case of Financial Engines’s investment advice, are “very attractive on a cost-benefit basis.”
While Taylor won’t detail the cost 3Com is absorbing by offering the advice free to employees, experts in the field say providers typically charge around $30 a year per participant, although some recent plans price out as low as $10.
Last October, after a team of finance and human-resource executives picked Financial Engines over another Internet service that Taylor won’t identify, 3Com kicked off its program. By March, 20 percent of its eligible 401(k) employees had chosen to use the service, considered a healthy sign-up rate for a new program. And, says the controller with some wonderment, “we’re actually seeing portfolio changes occurring based on the modeling” the company did to support the case for helping employees make wise 401(k) investment decisions. At 3Com, a total of $400 million in 401(k) assets are held among 13 fund options from State Street Global Advisors, and can also be funneled into 200 mutual funds.
In deciding to provide an Internet investment- advice service, though, 3Com and the relative handful of other companies signing up online advisers for their 401(k) participants must deal with sobering questions about the real value of the benefit to employees, and to the company itself.
One concern is that the online advice offered may be subpar — a worry increased by the negative reviews some advisory services got in a comparison test by Forrester Research. “In general, most sites perform poorly, suffering from limited scope or impenetrable questions that make it difficult for customers to move through the process and actually get advice,” says Jaime Punishill, senior analyst at Forrester.