Providers of 401(k) plans face a fast-approaching deadline to disclose more information about what they charge consumers. FutureAdvisor, a personal investment management startup that positions itself as an alternative to traditional advisors, is using the new rules as an opportunity to roll out a service that personalizes the cost of retirement products.
Fresh off a $5 million investment from Sequoia Capital, FutureAdvisor this morning launched a tool that lets people analyze the administrative expense of their 401(k) plans and see how those costs stack up against other options. "You can look at your 401(k) plan and run comparisons to see if it's excessive in terms of fee structure," says Bo Lu, co-founder of FutureAdvisor.
The costs of 401(k) plans are in the spotlight because of regulations from the Department of Labor's Employee Benefits Security Administration thatl go into effect Aug. 30.
The Erisa 404 (a)(5) rules will give consumers the chance to view all fees charged against their investments. That includes sales loads, fees, management expenses and other money charged to or deducted from individual accounts.
FutureAdvisor will shows how much a person is paying in 401(k) fees per year and how much they will pay over their lifetimes. It then provides personalized recommendations to reduce fees. Users log in to the firm's site, and without a sign-up requirement, can view how expensive their 401(K) plan is on average when compared to other portfolios.
Lu says the information is available through the Department of Labor, but is difficult to navigate and view for analysis. FutureAdvisor accumulates and runs the Department of Labor fee information through its automated equations to produce the reports on user fees, and the costs of similar plans based on that user's demographics -- along with recommendations on how users can reduce costs. "Without giving any information about yourself, you can see what a set of investments" that meet the user's profile costs, "what your fees are and what you can do about it," Lu says.
Branding itself a bit like Simple or Movenbank, FutureAdvisor takes an adversarial posture toward traditional wealth management, contending it's too expensive and complex. But the company has opened the door to possible partnerships with banks and other financial institutions as a value-add to wealth management.
FutureAdvisor is similar to personal financial management sites but focuses more on investments than on budgeting for personal spending. It uses Yodlee's account aggregation tools to pull together information on its users' accounts and financial relationships, then runs that information through its internally developed analytics engine, which also leverages prevailing investment principals used by financial analysts. Its internally produced math engine comes up with recommendations on reducing fees, optimizing tax strategy and choosing investments.
It's free, though there is the option of fee-based personal advice services. FutureAdvisor says it makes money primarily off of these premium service fees, which range from $49 to $195 per year. Users sign up for the service, and answer a series of questions to produce a profile based on age, risk tolerance and current investment situation.
That initial profile is then used to track movements in various funds or investment products that a person has in his or her portfolio, then that information is run through the firm's algorithms to find clues that the allocation may be out of balance with the profile, given the person's risk or life stage. The service claims independence by not charging commissions or selling specific insurance or annuities, and does not charge the 1% fee that most traditional financial advisors receive.