Sixty-Percent of Participants Have Their 401(k) Professionally Managed When It's "Automatic"
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Managed Accounts Benefit "At-Risk" Participants and Improve Overall Health of Company 401(k) Plans, According to New Financial Engines Data

PALO ALTO, Calif. April 21, 2008 – Financial Engines, a leading provider of independent investment advice and managed accounts, today issued data showing that when plan sponsors automatically enrolled existing retirement plan participants into a managed account program, an average of 60 percent stayed with the program. Automatic enrollment into managed accounts also had a dramatic effect on the overall health of the employer retirement plan. Prior to enrollment, an average of only 7 percent of participants had well balanced, risk-appropriate portfolios. After automatically enrolling all eligible plan participants into managed accounts, an average of 59 percent of all plan portfolios - including both participants who stayed in managed accounts and those who declined -- were well diversified and at the appropriate risk levels within 8 months.

In addition, the portfolios of participants that were automatically invested into managed accounts had higher expected growth rates after Financial Engines made allocation changes to their portfolios. On average, these allocation changes were projected to increase the expected annual growth of participant portfolios by 91 basis points annually, net of fees.1

"The 401(k) has become the primary retirement vehicle for most of our employees," says Richard Mayer of Standard Register. "We decided that the best way to reach the people who may not be investment savvy and required assistance with their retirement planning was to automatically enroll our entire participant base into managed accounts. As a result of doing this, we were able to transform the health of our 401(k) plan easily and quickly."

The plan sponsors included in the data set represent a growing trend toward implementing automatic features in 401(k) plans to address participant inertia and help participants get on track for a more secure retirement. Initially, plan sponsors focused on using the automatic 401(k) to help only new employees. Today, plan sponsors are applying the automatic 401(k) to help existing employees as well.

Spurred by the Department of Labor's regulations on Qualified Default Investment Alternatives, a fast growing feature of the automatic-401(k) is automatic-investing. Through automatic investing, a plan sponsor designates an investment professional to invest a participant's portfolio on their behalf, typically through a managed account program or lifecycle fund. Of the 225,000 participants enrolled in the Financial Engines managed accounts program as of December 31, 2007, more than 20 percent were automatically invested.

"The automatic 401(k) is the most significant innovation in retirement since the creation of the 401(k) plan," says Jeff Maggioncalda, president and CEO of Financial Engines. "Companies applying the automatic 401(k) merely to new participants are only experiencing a small part of the benefit, whereas applying these innovations to existing employees accomplishes in months what it would take decades to achieve if only applied to new employees."

Participants With Lower Salaries, Lower Balances Stayed In Managed Accounts

In an evaluation of plan sponsors that implemented automatic investing for nearly 80,000 existing plan participants, Financial Engines found that an average of 60 percent of participants took advantage of managed accounts while 40 percent decided to manage their 401(k) accounts themselves after a personalized 60-day communication campaign.2 In general, the participants who stayed in managed accounts after being automatically invested had lower salaries, lower balances and lower savings rates. These results demonstrate that automatic investing is an effective method of reaching those participants who need the most help. Conversely, participants who chose to manage their 401(k) accounts on their own tended to have higher salaries, higher balances and higher savings rates.

  Managed Account Members (Participants remaining in managed accounts) Non-members (Participants declining auto-investment in managed accounts)
Average Age 43 46
Median Salary $40,780 $56,971
Median Balance $12,931 $36,150
Average Balance $33,048 $76,804
Average Contribution 6.0% 9.0%


As of March 31, 2008, the average annual account management fee that members pay within these plans is 27 basis points. When combined with the underlying fund fees that these managed accounts members pay, the average total "all-in" fee is 63 basis points (0.63 percent), comparable to other professionally managed vehicles. For example, a hypothetical participant with a 401(k) balance of $33,000 would pay $210 in total annually-including both the managed account fee and the underlying fund fees. By way of comparison, for plans in this analysis that included lifecycle funds in their investment line-up, the average lifecycle fund fee is 76 basis points (0.76 percent).3

About Managed Accounts

A managed account is a professionally managed investment portfolio within a defined contribution plan (typically a 401(k) plan), in which an investment manager manages the plan participant's account for the participant. In its managed accounts program, Financial Engines creates diversified, personalized portfolios consistent with the participant's risk preferences and retirement horizon using the existing investment choices within the plan. Managed accounts have been designated as a Qualified Default Investment Alternative by Department of Labor regulations, and can be selected by plan sponsors as the default investment option for both new and existing employees.

Once participants are enrolled in managed accounts, Financial Engines transitions their portfolios to the appropriate risk and diversification levels. In addition to personalized portfolio management, participants in a Financial Engines managed account program receive regular personalized communications showing how their portfolios are doing. Managed account members also have ongoing access to investment adviser representatives. Financial Engines is able to personalize managed accounts by automatically taking into account plan features, such as cash balance plans and company stock. Once a participant provides additional information about outside assets, Financial Engines is able to further tailor the management of the account.

About Financial Engines

Financial Engines is a leading provider of independent investment advice and managed accounts to defined contribution plans. Founded by Nobel Prize-winning economist, William F. Sharpe, Financial Engines serves millions of employees at many of America's largest corporations. Patented advice technology and institutional-quality investment methodology allow Financial Engines to offer an array of advisory services to meet the needs of a wide range of investors. For more information, please visit
www.financialengines.com.

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Clients include both those that are Financial Engines advisory and sub-advisory clients.

 
1 Expected growth is a way to quantify the impact of investment decisions on retirement portfolio outcomes. The expected return of a portfolio is defined as the mean return expected over a single year for that portfolio. Expected growth, on the other hand, is defined as the median return expected over multiple years for the portfolio.

The relationship between the two concepts is:

Expected Growth = Expected Return - ½ (portfolio variance)

Thus, the difference between expected growth and return is one-half the variance of the portfolio, which can be viewed as a "risk penalty" that applies to portfolio growth. Using expected growth to compare portfolios across individuals allows one to explicitly recognize the risk-reward tradeoff inherent in investments. In contrast, ranking high expected return portfolios as "better" would ignore the fact that more risk is generally required to achieve higher expected return. Keeping expected return constant, an increase in risk by itself will decrease the long-term growth rate of a portfolio. Expected growth for this sample was calculated as of 12/31/07.

Expected growth does not represent an actual Forecast of a typical member's portfolio nor adjustments made to a member's portfolio over time. Expected growth is not a guarantee of actual future returns and a portfolio with higher expected growth may not be better for all investors in all cases. Financial Engines uses expected growth as one method of evaluating portfolios. Recommended member portfolios are based on a variety of criteria including asset expected returns, volatilities, correlations, investment horizon and investor preferences.

2 The dataset analyzes the results of plan sponsors that automatically enrolled all existing employees in Financial Engines managed accounts as of December 31. 2007. These organizations represent nearly 80,000 participants with more than $3.5B in plan assets as of 12/31/07. The sponsors also represent a range of industries from manufacturing to healthcare to professional services.

3 Mutual fund data provided by Lipper Inc., a REUTERS COMPANY.