Betterment, rivals tap into wide open 401(k) market for robos

In spite of tough hurdles, online platforms are positioning to offer plans to the underserved

Jan 28, 2016 @ 1:24 pm

By Alessandra Malito

Betterment and a host of competitors are betting that now may be the perfect time for robo-advisers to start providing advice for 401(k) plans, a sign that plans for defined-contribution portfolios may be an untapped market.

This month, Betterment, one of the original online automated investment platforms with $3.2 billion in assets under management according to its latest ADV, launched Betterment for Business, a 401(k) plan provider for employers. Since announcing the service in September, 50 employers have hired the robo to offer 401(k) accounts to employees.

Jon Stein, chief executive of Betterment, said the interest shows the early promise of the market.

"We tapped into something bigger than we expected here," Mr. Stein said in an interview at Betterment's New York office.

According to a 2015 Bureau of Labor Statistics study, 57% of American workers have access to employer-sponsored defined-contribution plans, but only 39% of those employees participate.

Grant Easterbrook, a former Corporate Insight analyst and founder of Dream Forward Financial, an emerging automated 401(k) provider that has not yet launched, said the market is big enough for more firms and startups to jump in.

"It is a massive market," he said. "I don't see it as a winner-take-all scenario."

Other robos are starting to see the promise in the 401(k) market, too.

Online automated platforms TradeKing Advisors, with about $12 million in AUM, and SigFig, with almost $70 million in AUM, both said they are interested in getting more involved in defined-contribution plans.

"The 401(k) offering is absolutely on our radar," David Dusseault, chief operating officer for TradeKing Advisors, said in an email. "It makes a lot of sense for companies, and it's on our road map for the coming year."

Mike Sha, chief executive of SigFig, said managing or providing advice on 401(k)s can be tricky because of the limited lineup of options and restrictions on investments, but the firm is "currently building relationships to improve the choices employees have."

Hedgeable, a risk-based robo-adviser with about $35 million in AUM, has been offering solo 401(k)s since 2011. Mike Kane, chief executive of the company, said Hedgeable targets and provides defined-contribution plans as well as other types of retirement accounts for self-employed individuals and their spouses because these professionals are underserved.

"We haven't focused on large companies, that's Vanguard and Fidelity's domain," Mr. Kane said. "The whole platform has been about democratization of high-net-worth products."


Some robos aren't planning to get more involved in the 401(k) market. Personal Capital, a hybrid robo-adviser with $1.9 billion in AUM according to a spokeswoman, and WiseBanyan, a self-claimed free robo-adviser with about $35 million in AUM, do not currently foresee providing 401(k) plans. They do, like other platforms, offer retirement advice through IRAs and Roth IRAs. Wealthfront did not respond for comment.

"We found the direct 401(k) business to be both very crowded with capable players and that the small-business sector is particularly difficult to scale," Mark Goines, chief marketing officer at Personal Capital, said in an email. "We will continue to help consumers understand their entire financial lives (including their 401(k) investments) and help them manage their investments effectively."

There are hurdles these firms would have to overcome to do what Betterment for Business is doing, including finding a cost-effective way of administering plans and building a brand that employers could trust, said Sean McDermott, an analyst at Corporate Insight.

It also takes a substantial amount of time and resources to develop an infrastructure to support administering 401(k) plans, including systems that can analyze funds, manage thousands of plans and follow referral rules, said Rob Foregger, co-founder of NextCapital, a digital platform that provides advice to defined-contribution plans.

"It goes far beyond the user interface and the front end," Mr. Foregger said. "When you add things up on paper it may look very easy to shift from retail to DC, but there is a significant expertise required to do so."

The work may be worth it, though, as robos will be positioned well if the Department of Labor's fiduciary standard rule passes, which would require brokers working with retirement accounts to act in their client's best interest, he said.

"The pending DOL standard will, I think, make digital advice a de facto solution inside the DC market," Mr. Foregger said.

Chris Costello, chief executive of Blooom, an online platform individuals can hire to manage any established 401(k) plans and has about $184 million in AUM, said it is the wiser choice to provide advice to plans as opposed to providing the plans themselves. Financial Engines, an online automated platform specifically for retirement accounts, which has about $104.4 billion in AUM, manages 401(k) plans through an employer.

"I think one of the hardest sales in maybe the entire financial services industry is selling a company and then implementing a new 401(k) plan," Mr. Costello said, adding that it is a long and strenuous process for any human resources units at companies. It's even harder for firms to sell 401(k) plans to companies that already have defined-contribution programs in place.

"What I hope these upstarts who are entering the 401(k) record space like Betterment or like Captain 401 bring is [a] focus on the group of companies out there that don't currently have a 401(k) set up," Mr. Costello said.

Captain 401 is an automated 401(k) provider that launched last year. The firm administers the plan, syncs with payroll and HR software, acts as a record keeper, and provides advice to employees on their accounts.

"The 401(k) industry hasn't changed very much in the past 20 to 30 years, but what has changed is technology," said Roger Lee, chief executive and co-founder of Captain 401. He said his company was created to make it easier for employers to offer 401(k) accounts.


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