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CitiStreet Advice Designed to Retain Assets

An announcement by 401(k) plan provider CitiStreet last week that it will provide workers with expanded advice about investment choices in their retirement plans may be pushing government regulations to their limits in an aggressive effort to retain rollover assets, observers said last week.

The move, while perfectly legal, represents the first time a 401(k) provider will take fiduciary responsibility for suggesting specific mutual funds to its investors. It is the result of a U.S. Department of Labor (DOL) opinion issued in December that allows financial services companies to provide investment advice directly to their plan participants, provided that advice comes from a third party. The opinion, observers say, is intended to prevent firms from recommending certain mutual funds that yield higher fees that would be more profitable to a fund complex.

CitiStreet said that its retirement plan participants will be able to log on to a Web site or call a telephone number to learn which funds will best suit their goals. The company, a joint venture between State Street Corp. and Citigroup based in Quincy, Mass., will also send representatives into the workplace to provide information to investors.

The firm, which serves 6.5 million plan participants and oversees $200 billion, has fulfilled the DOL's requirements for providing the advice by partnering with Financial Engines of Palo Alto, Calif., which specializes in providing investment advice and the technology used to disseminate it.

While other companies have offered more general advice or partnered with third-party advice firms that serve participants directly, CitiStreet is "going to the edge" of the DOL's rule opinion by distributing the advice of a third party itself, said Lowell Smith, a Philadelphia-based retirement plan consultant.

The benefit to CitiStreet, he said, is that the firm will develop more intimate relationships with plan participants, who will be more likely to keep their assets with the firm should they eventually roll them into other vehicles.

By delivering advice themselves, CitiStreet "will be able to retain the client relationship," agreed Joshua Dietch, a consultant with Cerulli Associates of Boston. "That's a pretty powerful message in the marketplace considering that they have millions of participants that they can take this model to."

Still, CitiStreet spokeswoman Sandy McCarthy said that the advice will be "much more for the benefit of the participant as it is to keeping assets in the CitiStreet fund."

She said that the firm found that "participants need more assistance in helping them plan for their retirement," so CitiStreet executives decided the firm should find a way to provide more specific advice.

CitiStreet had previously worked with Financial Engines to provide limited advice to investors. Prior to the release of the DOL opinion late last year, that advice was restricted to the recommendation of only five index funds.

Now, McCarthy said, her firm will be able to suggest any fund that is offered within a sponsor's retirement plan. The firm will examine all of a family's investments and suggest changes in allocation, as well as whether an investor should take on more risk. More firms will likely follow CitiStreet's lead. Indeed, the DOL's opinion was spawned by an inquiry from SunAmerica, a financial services firm in Los Angeles that is planning a similar program. "It's not like other companies aren't thinking about it," said John Rekenthaler, president of online advice at Morningstar, the Chicago fund researcher. "CitiStreet is just kind of quick to roll it out. It's where defined contribution advice is going."

Pending Legislation

CitiStreet's move comes at a time when Washington lawmakers are debating several bills that would ease regulations governing how and which companies can provide advice to 401(k) participants. Should new legislation easing 401(k) advice restrictions become law, observers said it could change the way companies that specialize in providing advice operate. For example, observers said that with some fund complexes choosing to build their own advice models, the marketplace could be more limited for the likes of Financial Engines, particularly since it has been acting as a fiduciary.

Financial Engines president and CEO Jeff Maggioncalda said his company was well positioned to weather those kinds of changes. In fact, he said that his firm would likely benefit from bills that expanded fund companies' ability to provide advice.

Competition in the advice market is scant, he said. With firms like mPower of San Francisco serving middle-market plan sponsors and a similar firm, Invesmart of Pittsburgh, serving even smaller plan sponsors, Maggioncalda said that Financial Engines has the large-plan market virtually to itself.