Thanks to the Internet, however, workers can now get personalized investment advice free or at low cost. Three of the leading Internet retirement advice sites--Quicken 401k Advisor, Morningstar's ClearFuture and Financial Engines use information you provide about your goals, risk tolerance and assets to come up with a list of suggested mutual funds for your retirement accounts.
All three sites work with the investment choices you have available in your 401(k), making detailed recommendations about which funds to use and what percentage of your contributions to put in them. If you have an individual retirement account in addition to your 401(k), two of the sites, Quicken and Financial Engines, also will recommend funds for your IRA.
Of the three, Quicken's site is probably the best fit for most workers--which is nice, because the service is also the only one that's free. Financial Engines' state-of-the-art advisor is good for more sophisticated investors who want to play with various what-if scenarios. Morningstar's site is more limited in what it can do, although it's good for beginners and improvements are planned.
All three sites use modern portfolio theory to produce their recommendations. This theory, widely used by financial planners, holds that investors can reduce risk by spreading their money among various asset classes, such as stocks, bonds and cash. Within those asset classes, money is distributed among various investment styles, such as large-company growth stocks and small-company value stocks.
The sites have different philosophies about how to implement the theory, however, and different criteria for screening investments.
That can lead to some confusing results. After feeding my data into the three sites, I was given wildly different recommendations for which funds to use and how much to put in them. Financial Engines scorned funds that Quicken liked, and vice versa; Morningstar recommended a couple of funds the other two wouldn't touch.
But don't let that scare you away from these sites. If you consult three human planners, you're also likely to get three very different retirement plans. The fact is that all three plans were acceptable and any of the three would be far superior to the usual ways workers determine their asset allocations: guessing, randomly distributing contributions or asking a brother-in-law.
Here's a closer look at each site's pros and cons:
* Quicken 401k Advisor: There are basically two ways to handle asset allocation: by doing a separate allocation plan for each of your qualified retirement plans or by constructing an overall allocation plan that coordinates investment choices among your 401(k) and any IRAs that you own.
Quicken uses the first method. For example, the advisor recommended I put 30% of my 401(k) into Fidelity Diversified International, the only foreign-stock option offered by my 401(k) plan. It recommended that the same percentage of my IRAs, which are held at Charles Schwab & Co., be invested in Scudder International.
What's the advantage of treating each account separately? It's largely psychological. If all your accounts are allocated the same, they should perform about the same. That reduces the chance that you'll have a steep decline in any one account, even if it's offset by a rise in another.
Another of Quicken's big selling points is that the details of more than 1,100 company 401(k) plans are already loaded into the site. If you work for a big company, chances are you won't have to tediously input all your plan's offerings--they're already there. Likewise, Quicken asks you which brokerage you use for your IRA so it can choose from among the available funds. It even asked if I used Schwab's OneSource option, a fund supermarket, so that it could recommend funds that were included in OneSource's no-transaction-fee plan.
For IRAs, Quicken tends to use highly rated, well-known funds with relatively low expenses, such as Vanguard index funds.
One of Quicken's drawbacks is that you can end up with a riskier portfolio than you'd planned on. As a moderately risk-tolerant investor, I expected to have at least some cash or bonds recommended for my portfolio. To get the advisor to include some, however, I had to go back and change my answers to a couple of questions, making myself sound more conservative--and closer to retirement--than I actually am.
* Financial Engines: Unlike Quicken, Financial Engines coordinates your 401(k) with your IRA when determining an asset allocation plan. This allows it to select only what it considers to be the best investment choices within your 401(k) and then round out the asset allocation with investments in your IRA.
Given the lackluster options available in my company plan, it's not surprising the program singled out the cash option, the Pimco Total Return bond fund and the low-cost stock index fund for most of my 401(k) contributions. The advisor recommended using my IRAs--where the selection of funds is much broader--for the foreign, small-company and large-company value portions of my asset allocation.
To that end, Financial Engines suggested investing in three mutual funds I'd never heard of: UMB Scout WorldWide, a foreign stock fund; Excelsior Value and Restructuring, a large-company value fund; and Managers Special Equity, a small-company fund. All three are highly rated by Morningstar, although its analysts note that the small-cap fund is a bit expensive compared with its peers.
I didn't have to take Financial Engines' suggestions at face value, however. The site allows users to customize their recommendations even further by locking in--or locking out--certain investments. This can help anyone who wants to keep a treasured fund or avoid investments that conflict with ethical beliefs.