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Nobel Prize Winners Give Retirement Advice To Aging Baby Boomers

Eminent theoreticians are cashing in on what is sure to be a surge in demand from baby boomers for retirement advice.

The boxer George Foreman, when asked when he would retire, replied, “The question isn’t when I want to retire, it’s at what income.” For most baby boomers, the question is the same, and the answer isn’t reassuring. Never before in the modern era have so many been so unprepared for so long a stretch without a paycheck.

Or so ignorant of their options. To the rescue, improbably: Nobel Prize winners. Harvard University economics professor Robert Merton, who won the Nobel in 1997, recently sold his retirement advisory business, SmartNest, to Dimensional Fund Advisors, an Austin, Texas–based money manager with $11 billion in defined-contribution assets. Meanwhile, another Nobelist, William Sharpe, professor emeritus of Stanford University, just took his retirement advisory firm, Financial Engines, public. Its shares jumped 44 percent on the first day of trading.

Both these eminent theoreticians are cashing in on what is sure to be a surge in demand from baby boomers for retirement advice. “Defined-contribution plans were designed to be supplementary,” points out Merton. “But they’ve turned into the core retirement plan, and most participants get zero advice on them.”

Dallas Salisbury, president and CEO of the Washington-based Employee Benefit Research Institute, foresees more fund companies signing deals with advisory firms like SmartNest and Financial Engines that rely on computer models to crank out semicustomized advice. “A computer model may be deemed more objective” than a financial planner, notes Salisbury, and the Department of Labor stipulates that advice must be “fee neutral.”

Merton’s SmartNest grew out of the waning of the old defined-benefit plan. “SmartNest is targeted to large [DC] plans and to the middle- and working-class Americans who are part of these plans but don’t have the resources to hire a financial planner,” explains Merton. “Given that we were designing advice for the masses, we asked ourselves, ‘What’s the No. 1 thing that people want in retirement?’ To have a standard of living that is close to their incomes during their final years of their working lives.”

Companies using SmartNest will be able to offer DC plan participants a managed portfolio. Based on their answers to a questionnaire, participants will be steered via computer model into suitable Dimensional funds, such as small- and midcap, launched expressly for the managed account. Paying for the advice? The plan sponsor.