With concern since the Enron scandal about potential bias in stock analysts' investment advice, CitiStreet announced today a partnership with Financial Engines to become the first benefits provider to offer retirement plan participants independent integrated investment advice.
The Quincy, Mass., company, a joint venture between State Street Corp. and Citigroup Inc., said it will offer its 401(k) customers this advice from Financial Engines, a Palo Alto, Calif., financial advisory firm.
Ray Martin, the president of CitiStreet Advisors, said the deal for the new service was prompted by a Dec. 14 opinion from the Department of Labor to let financial institutions give advice directly to plan participants as long as the advice comes from a third-party investment adviser.
CitiStreet, which administers $200 billion of retirement assets in the United States, has been offering Financial Engines' advice for four years, Mr. Martin said, but until the Labor Department opinion this was limited to advising generally on asset allocation strategies online. The opinion enables CitiStreet's call centers to use the Financial Engines technology to advise investors on specific funds - including State Street and Citigroup funds.
Financial Engines' advice is independent of CitiStreet, but it is limited to making recommendations from the investment choices arrayed in an employer's plan.
For small plans, with 1,000 to 5,000 participants, half to three-quarters of the investment options recommended may be State Street or Citigroup funds, Mr. Martin said. For larger plans, the parent companies' funds could be 0% to 50% of those recommended.
The company began working on this deal Dec. 15, Mr. Martin said, in response to the Labor Department opinion, not in reaction to the Wall Street analyst scandals prompted by Enron's collapse.
"There is a built-in conflict of interest when you are a service provider offering your funds," Mr. Martin said. "Until December you couldn't offer advice on plan fund options. This technology and advice platform is provided by an independent financial adviser, and this really helps us level any conflict of interest."
Through the new service, CitiStreet will offer advice at its call centers and online. For plan participants who seek face-to-face contact, CitiStreet is also considering offering advice at onsite educational workshops.
Jeff Maggioncalda, the president and chief executive officer of Financial Engines, said that before the Labor Department issued its opinion the call center could only offer advice on a set of level-fee index funds. But since Enron, he said, the government has seen that 401(k) plans are "high stakes" and require a higher degree of advice.
"The Department of Labor took a look and realized that companies needed to do a better job when it came to offering advice to retirement plan participants," Mr. Maggioncalda said. "Now we can offer holistic, high-trust, personalized advice across a broader set of services."
This "tears down the wall," he said, between call center and online advice and lets people use the two together. He said that Financial Engines serves 2.4 million participants in 750 companies' plans. His company has seen a rapid increase in business in the wake of Enron, he said.
CitiStreet's Mr. Martin said that, when participants have used Financial Engines through the call center, they have increased savings 150%. Projections indicated that using the advice nearly doubled a caller's chance of reaching his or her retirement goals, he said.
Burton Greenwald, a Philadelphia investment analyst, said CitiStreet is taking an important but possibly risky step by linking itself with an independent adviser.
"CitiStreet is accepting a lot of fiduciary responsibility here in an effort to provide advice," he said. "It could help them bring in clients, but it could also create some litigation here."
Mr. Greenwald said most such companies sidestep fiduciary responsibility by giving employers the option of hiring a firm like Financial Engines on an independent basis so that the plan sponsor gets the fiduciary risk.
Mr. Martin said that when a company takes on fiduciary responsibility there is always a risk. But as an experienced fiduciary in retirement plan administration, CitiStreet is easing the minds of a lot of large plan sponsors about offering advice, he said.
"For a large employer to offer this advice, he needs to know there are deep pockets as a fiduciary to go after in case there is a problem," Mr. Martin said. "People are cautious after Enron. When we are willing to step up as a fiduciary for advice, that is meaningful. What we have done is lowered the sponsor's perception as to the liability of offering advice versus the liability associated to a company that does not offer advice."
Mr. Martin said the next step is for CitiStreet to take the initiative in reaching out to participants. The company has tested a program to give advice when it delivers an online seminar, he said, and at these seminars, the representative could have a participant fill out a five-minute survey from which a score can be derived to indicate a plan-specific mix of funds.
Mr. Maggioncalda said Citi-Street's advice model is not just for retirement plans. He said it is a model for any financial institution that wants to provide advice scaled to the mass affluent.
"You can't give holistic advice to the mass affluent. It just isn't economically feasible," Mr. Maggioncalda said. "We are pioneering an event-driven approach. So when you have an IRA rollover, or a 401(k) plan, or a bonus, you can take a less sophisticated representative with strong technology and solve one problem. This advice is economical and helps develop relationships over time."
