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As Competition Heats Up, Online Advice Becomes Mandatory in 401(k) Offerings

When Boston-based Fidelity investments rolls out its next generation of financial tools at the end of June, it will up the ante in the online advice game for 401(k) providers.

Beth Flanagan, vice president of product development at Fidelity's Boston office, says the new tools will feature "increased functionality and better design navigation." It will include collaborative browsing so representatives can walk consumers through asset allocation models and suggested selections for their portfolios.

As part of its "educational offering" through NetBenefits, Fidelity was one of the first firms to offer rudimentary advice tools to plan sponsors (employers) for their plan participant's (employees) use. That was about three years ago. Now, such tools are available to more than 600 retirement plan sponsors covering in excess of three million people.

Fidelity is not alone in seeking to deliver online advisory tools to plan participants. Established firms like The Vanguard Group, headquartered in Valley Forge, Pa. and Baltimore-based T. Rowe Price Associates have recently cut deals with technology firms like Palo Alto's Financial Engines, Inc. and San Francisco's mPower Advisors, L.L.C. in order to expand their online tool kits.

"I think the momentum is clearly in the favor of advice," says Sean Haggerty, principal manager of participant services for Vanguard's full-service 401(k) business. "I think that the ability to provide advice at scale is clearly something the Internet can give to the 401(k) market."

John Doyle, vice president of marketing and communication for T. Rowe Price retirement plan services, says the "Internet is a key delivery mechanism for 401(k) services. What we've been doing is allowing plan sponsors and participants to get info in a more visual way. In the last year-and-a-half, advice has become a real hot button."

As well, the Internet revolution has opened the door to upstart electronic 401(k) providers, which are bringing their own tools and strategies to bear in the battle for pension assets. Take Persumma Financial LLC, for example. The Newton, Mass. firm touts itself as a Web-based full service 401(k) provider, created through a partnership between Springfield, Mass.'s MassMutual Financial Group, a Fortune 500 company, and Boston's Nextera Enterprises, Inc.

Spencer Williams, president and ceo of Persumma Financial, in Newton, Mass. notes that the 401(k) market is still young at twenty years old, yet it is entering what he calls its "fourth generation" of development. The first generation of development was about tax-free savings, the second about benefits, the third centered on ensuring expanded choice of investments for employees and the fourth, he says, is about a term he dubs "advised choice" -- a euphemism for informed choice or assistance. "What's going on with respect to technology is that we arrived at a beautiful nexus that allows technology to deliver advised choice to an individual."

In the 20 years that 401(k) plans have been around, more than 39 million Americans have accumulated $1.7 trillion dollars in their accounts, with research firm the TowerGroup, based in Needham, Mass., predicting that assets in such plans will hit $5 trillion by 2005.

A February study of 10 million 401(k) participants by the Investment Company Institute and the Employee Benefit Research Institute, which are based in Washington, found that the average account balance at the end of 1999 was $55,502. About 42% of participants had balances under $10,000, while 15% had balances exceeding $100,000. The older the worker, the higher the balance.Because so many participants have balances that normally fall under the radar screen of investment advisors, it spells opportunity for plan providers to fill the advice gap, experts say.

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