In April, Betterment moved into the retirement planning space with RetireGuide, a tool that automatically provided retirement savings advice by calculating an estimated of an individual's retirement and how much they needed to save to get there, and helped retail investors open up individual retirement accounts.
But in the first quarter of 2016, Betterment plans to go further; the company is becoming a 401(k) provider.
The New York City-based “robo-advisor” announced the coming of Betterment for Business on Friday, a 401(k) platform that provides plan sponsors with administration and fiduciary support as well as automated investment advice for every participant. In a statement, Betterment said the product makes the company “the only full-stack, bundled 401(k) provider to launch in the last three decades – virtually since ERISA laws introduced 401(k)s to the marketplace.”
Leveraging the technology from its retail offering, employers can enroll new participants in a defined contribution plan through a paperless process. Plans are administered with a dashboard of automated tools that Betterment says will help employers meet fiduciary and regulatory compliance responsibilities.
Employees’ retirement funds with Betterment for Business will be invested in a globally diversified portfolio of ETFs based on goals and risk tolerance. Participants can integrate their Social Security benefits, pensions, and a spouse’s financial data into their retirement plan. If they use Betterment’s other products – taxable investment accounts, IRAs and trust accounts – the algorithms will automatically optimize the tax impact on the investor.
Jon Stein, the founder and CEO of Betterment, said providing 401(k) plans has always been a part of the company’s roadmap, but it became a priority last year when Betterment was shopping around for its own 401(k) plan. The process was confusing for a company staffed with financial professionals, and Stein said he could only imagine what it was like for companies without industry experience.
“We realized we could do all of this better and for less cost, but include advice,” Stein said.
The launch for automated investment accounts in the retirement space comes at a time when the Dept. of Labor is proposing new rules to ensure all advisors to retirement accounts meet a fiduciary standard. Critics of the plan argue smaller investors could not be profitably served by many advisors if the new rules are passed, and many then will not have the benefit of advice; advocates say new technology can step into the market and fill the gap and provide conflict-free investment options optimally allocated for an individual's goals and risk tolerance. “It was though they were almost inviting us to launch this product," Stein said.
“How to save and invest coordinated with outside assets… it’s almost criminal that we don’t have that,” Stein added. “It should be a national right that we all have advice on how to retire well. This is the first step to that being a part of every plan.”
It’s also a potentially lucrative new revenue stream for the venture capital-backed startup. The defined contribution space is a $5.5 trillion market and growing, Stein said.
The robo advice space is getting crowded as well, with custodians and now asset management firms launching their own options. The 401(k) market provides a lot of green space for these tools.
A Necessary Approach
“Going direct to consumer only will be expensive, highly competitive with the big online brands (Schwab, Vanguard, TDA, E-trade, etc.), and they are swimming at the bottom of the fee chain with small basis point driven revenues,” said Timothy Welsh, the president and founder of Nexus Strategy. “Ultimately, the qualified plan marketplace is where all of the robos will end up.”
Welsh pointed out that Betterment isn’t the first company to bring automation to the retirement world. Companies like Financial Engines and Blooom haven’t provided 401(k) plans, but have found success providing online advice and automated management for investors, and tools for plan sponsors. Another automated investment platform in the managed accounts space for retirement plans is NextCapital, co-founded by Rob Foregger who also helped launch Everbank.com and Personal Capital. Morningstar Retirement Manager also provides plan sponsors managed accounts.
But Michael Kitces, an industry blogger and co-founder of the XY Planning Network, thinks Betterment’s approach is necessary to break through in the 401(k) market due to so many layers to the process.
“There are asset managers, there are record keepers, and there are providers that have to weave this all together, which frankly makes it very hard for new players to come in,” Kitces said, noting how all of these different players drive up fees. “If you’re going to disrupt, you basically have to build the full stack all at once, which is already how robo-advisors did it direct to consumers.”
Because Betterment doesn’t have to pay a record keeper or a brokerage, Stein said Betterment for Business’s plans are cheaper than others on the market. The fees are tiered, with the smallest companies paying 60 basis points and the largest (at least $1 billion AUM) paying 10 bps. Upfront fees are waived for plan sponsors with more than $1 million in assets.
When shopping around, Stein said the least expensive plan he could find for his own company was 81 bps, and it didn’t include any advice for employees.
Chris Costello, the co-founder and CEO of Blooom, said there’s plenty of room in defined contribution for companies like Betterment to get involved because the incumbents have fallen so behind technologically, but wonders if robo-advisors will focus too much on price alone.
“I worry that they are commoditizing their services instead of focusing on all of the good that this new breed of robo-advisors are doing for a previously un-served market,” Costello said, adding that he doesn’t see Betterment as a threat to Blooom’s business model of helping individual participants regardless of who is providing the record keeping platform.
But if Betterment succeeds, Kitces thinks it could have the same effect on incumbent 401(k) providers that robos had on custodians.
“At the end of the end day, the pressure on custodians wasn’t really, ‘come out with a robo-advisor,’ per se, it was, ‘upgrade your old crappy outdated technology,” Kitces said. “Maybe a robo-advisor making a play in the 401(k) space is what’s needed to be the catalyst for the 401(k) distribution system to finally upgrade its archaic system."
