Breaking new ground in retirement planning, Betterment, one of the largest robo-advisers in the industry, will begin offering 401(k) plans to employers, the company said Friday.
Although there are start-ups in the market dedicated to creating and managing retirement plans, the new platform, called Betterment for Business, is the first of its kind from an online automated investment platform. In serving as a recordkeeper for defined contribution plan sponsors, Betterment will be competing against giants in the space such as TIAA-CREF, the Vanguard Group, Prudential, Charles Schwab and Fidelity Investments.
"People need holistic advice," said Jon Stein, chief executive of Betterment. "We think now is the moment the country is calling to us … it is past time for this to happen."
The retirement advice market has seen major pressures in the past seven months, starting with
President Barack Obama directing the Labor Department to move forward with a rule establishing a fiduciary standard, which would require advisers and broker-dealers to act in their clients' best interests and disclose any potential conflicts of interest.
Mr. Stein said that Betterment — a registered investment adviser with $2.6 billion in assets under management, according to its latest ADV — is a fiduciary and supporter of the proposed rule.
The retirement industry is already starting to see more automation, said Matthew Fronczke, an analyst and engagement manager at kasina. Rather than asking plan participants to pick products for their 401(k)s on their own, more plan sponsors and administrators are beginning to provide guidance, often via a website or software providers such as Financial Engines.
LOGICAL STEP
"Betterment getting into it is the next most logical step in terms of an area where individuals need the most help in building and managing nest eggs," Mr. Fronczke said.
Betterment for Business, expected to launch in the first quarter of 2016, will offer financial advice to plan participants as part of its 401(k) offering to employers. Participants' portfolios will consist of exchange-traded funds, similar to the investment options it has for its current retail customers. The fee will be based on assets under management: Larger companies will be charged 10 basis points, while smaller companies will be charged 60 basis points.
Companies can use an online dashboard to administer their plan and enroll new employees, while participants will be able to view their 401(k) portfolios alongside any other accounts that they may already have, including both traditional and Roth IRAs, as well as trust accounts.
U.S. retirement assets
totaled nearly $25 trillion as of the first quarter of this year, according to the Investment Company Institute, including $7.6 trillion in IRAs and $6.8 trillion in defined-contribution accounts.
Many say the robo-adviser's announcement was to be expected. Within the past year, Betterment has been making various announcements related to retirement, first making ties with the Social Security Administration to enable participants to integrate their Social Security benefits into their retirement planning, and then by
rolling out a personalized retirement advice calculator. Mr. Stein said at that time he hoped to one day create 401(k)s.
But this move into the retirement planning and 401(k) recordkeeper space won't come without challenges.
CHALLENGES
Louis Harvey, the president and chief executive of Dalbar, a research and consulting firm, said that the 401(k) market is divided between big and small plan sponsors, and the majority of the ones that Betterment will be able to reach, at least initially, will most likely be in the small-business sector.
"The key to success for an automated solution is to make the small market scalable and economical," Mr. Harvey said. "How will you sell to these people?"
Orchestrating a successful sales operation to target small- to mid-sized business owners will be difficult.
Assuming that Betterment has determined its primary target group, the company will have to ramp up its marketing efforts to prove to businesses that they should not only have a 401(k) offering for employees, but that Betterment is the right fit to provide it. That may be a difficult proposition, even if Betterment does have marketing experience promoting its retail and institutional platforms.
"Plan sponsors are reactive; they are not proactive," said Fred Barstein, the founder and chief executive of The Retirement Advisor University (TRAU). "They are not actively looking for retirement solutions."
The onus is on Betterment to identify the right prospects, get in front of them and then prove that its technology is an attractive fit.
Grant Easterbrook, co-founder of 401(k) plan administration startup Dream Forward Financial and former financial services analyst at research firm Corporate Insight, said that the retirement market is big, but sophisticated technology such as intuitive, user-friendly websites is typically lacking.
Over time, plan sponsors' and participants' expectations will change, and they will demand better digital platforms.
"As you move broadly to Generation X and Generation Y employees, it will be a bigger challenge,” he said. These younger generations "have higher standards for technology."
401(k) advisers needn't worry about Betterment's entrance into the market, said Chris Costello, the chief executive of Blooom, a robo-adviser focused on partnering with plan sponsors to provide financial advice to 401(k) participants.
"There's a value-add 401(k) advisers or consultants are bringing," Mr. Costello said. "I think they are going to have trouble competing with some of the really good 401(k) advisers and consultants that are boots on the ground and meeting face-to-face with plan sponsors."
