Ready for the Robo-401(k)?

Retirement Plan
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By Mark Henricks

NEW YORK -- If you don't participate in your employer's 401(k) plan because signing up and working with it is too much hassle, or you do participate but think fees are too high, Betterment may have an answer. The nation's largest purveyor of automated investment advice is rolling out a new 401(k) platform called Betterment for Biz that aims to address both those issues. While it is aimed first at small employers, larger companies are also potential users.

Betterment CEO Joe Stein says the New York-based company decided to enter the $5.5 trillion defined contribution retirement plan market, because it couldn't find a good platform for its employees. "After five months of a painful process and a really unsatisfactory client experience and a very expensive end result, we found ourselves scratching our heads and saying, 'How can the industry be so far behind the times?' " Stein said. "It spurred us to action."

When Betterment for Biz becomes available in 2016, it will compete largely on cost. Stein says costs will be no more than 60 basis points of assets under management. That is similar to the average expense ratio 401(k) plan participants paid to invest in equity mutual funds in 2014, according to an Investment Company Institute study. However, small employers with fewer than 500 employees commonly pay more. Stein said options presented to Betterment cost more than 80 basis points.

Betterment for Biz promises employers and participants easy-to-use, paperless online enrollment and management. Stein said that should encourage more employees to participate. The 2015 edition of the annual Transamerica Retirement Survey found that 80 percent of workers who were offered an employee-funded retirement plan took advantage of it, a number that has been steady the last few years.

The 401(k) industry, including competitors, seems accepting of the new entrant. Lower cost is always good, said Chad Parks, CEO of San Francisco-based Ubiquity, which has offered flat-fee online 401(k)s to small employers since 1999. "The higher the fees, the worse it is for participants because of the compounding effects," he said.

However, Parks said automated investment advice presents little improvement over available offerings. Ubiquity does not give advice directly to participants, instead contracting with outside fiduciary advisers for that service. And Betterment for Biz won't necessarily be cheaper, he said. According to Parks, Ubiquity's costs for small plans including advice are 30 basis points or less, or about half the high end of Betterment's expected costs.

"In order to do something better and different, they can't just stop with lower cost and automated investing," Parks said. He says the industry needs to boost participation and increase amounts beyond the 8 percent of annual pay the ICI study found was the median contribution in 2015.

"The main issue is coverage, not enough people in plans saving," Parks said. "At the end of the day, if there's not enough money in the account, it's not going to matter."

Other providers are working to boost enrollment. Alison Daigle, product manager for ALEX, an employee benefits communication platform from Chicago-based Jellyvision, says clients report significant increases in participation in 401 (k) plans after beginning to use the platform. An easy-to-use and engaging interface is key, she said. "It's not generally enough to tell employees that they need to be saving for retirement and giving them the tools to do that," Daigle said.

Cal Brown, a financial planner with Savant Capital Wealth Management, in McLean, Virginia, offers employers a 401(k) enrollment, management and advice platform developed by his company. He feels that Betterment's roboadviser technology will suit younger participants, but may not be for everyone. "One of our competitive advantages is we have a human being that is going to be an adviser that the owner or the administrator or any employee can call and talk of it they have question so issues," Brown said.

Ubiquity's Parks predicted many large financial service companies would follow Betterment with improved 401(k) platforms. "We're all going to look at each others best practices," he said, "and come up with the next-generation small business 401(k)."

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