401(k) robo-revolution is underway

Could human advisers be displaced as digital-advice firms use technology to deliver services to plan sponsors and participants?

Mar 17, 2018 @ 6:00 am

By Greg Iacurci

Tech upstarts are making inroads into 401(k) plans and that's bad news for some retirement plan advisers.

Such fledgling companies as Betterment for Business, ForUsAll, Human Interest and Vestwell, as well as more established players such as Financial Engines, are using technology to deliver services to plan sponsors and participants that traditionally are offered by human advisers.

These so-called 401(k) robo-advisers have a common theme: They believe the 401(k) distribution model is broken and that they can fix it by offering such services as fiduciary advice, professional account management, fund selection and plan compliance and administration, for less money.

The robos are primarily targeting small and midsize employers, a market they believe is neglected and overcharged. But this market also happens to be where most 401(k) advisers focus their efforts.


"I believe there's going to be a tremendous amount of consolidation at the broker-adviser level," said Shin Inoue, CEO of ForUsAll, which was founded in 2013. "We want to bring technology and scale so the package is ultimately far better than what people have today."

To a certain extent, the wave of automated technology platforms getting into the 401(k) market mirrors what's going on in wealth management in general.

Robo-advisers emerged in force in the wake of the 2008 financial crisis, with companies such as Betterment, Personal Capital and Wealthfront leveraging technology and passive investment strategies to offer relatively cheap, customized financial portfolios to consumers. Traditional firms such as Charles Schwab Corp., Vanguard Group and Fidelity Investments followed suit.

1.8MNumber of Robo-adviser users in 2016

Aite Group, a consulting firm, expects the number of robo-advice users to reach 17 million by 2021, from 1.8 million in 2016. Robo assets under management are expected to roughly quadruple from their level today, to $1 trillion, by 2020.

Some of these companies as well as new, 401(k)-focused ones, have begun marketing a similar philosophy and service to retirement-plan sponsors and participants.

Betterment, for example, branched into 401(k) plans with its Betterment for Business product in 2016. It has signed on roughly 400 clients to date, primarily employers with 401(k) plans of between $5 million and $50 million, said Tom Conlon, head of client relations for the retirement-plan business.

Similar to Betterment's wealth-management platform, Betterment for Business provides every participant with fiduciary investment advice and a professionally managed account.

In addition to handling compliance, record-keeping and custodial work for the retirement plan, Betterment takes on investment selection, due diligence and monitoring for employers, which are staple services for most 401(k) advisers.

"I think the robo record keepers are saying, 'We have everything: the investment solution, the [default investment], the plan design,'" said Fred Barstein, founder and CEO of The Retirement Advisor University. "They're saying, 'Hire me. If you want an adviser, we're not against it but it's not our distribution model.'"


The emergence of 401(k) robo-platforms coincides with a few broad trends playing out among defined-contribution plans.

Perhaps most significantly, default investments such as target-date funds have skyrocketed in popularity.

The Pension Protection Act of 2006 provided legal protections for employers using TDFs, managed accounts or target-risk funds — collectively called "qualified default investment alternatives," or QDIAs — to hold the contributions of automatically enrolled participants.

As auto-enrollment has gained broad acceptance as a best practice, QDIAs have seen a surge of participant money. TDFs have been the near-term winner — of the 70% of 401(k) plans that have a QDIA, nearly 80% use TDFs, according to the Plan Sponsor Council of America. Only 8% use managed accounts.

Target-date mutual funds held approximately $1.16 trillion at the end of January, according to data from Morningstar Inc. That's up from $108 billion in 2006.

However, some observers expect managed accounts to gain traction, as costs improve and plan sponsors and participants seek out more customization. Proprietary managed-account products for participants are the core of most robo-adviser offerings.

"The money isn't in the record keeping," Mr. Barstein said. "It's really a fight for the QDIA. And isn't the fight for the QDIA really the fight for the hearts and minds for all the participant assets?"

Human Interest, Vestwell and Betterment are examples of robos offering managed accounts in addition to plan administration and record keeping. Human Interest and Vestwell's managed accounts are voluntary for participants. ForUsAll doesn't offer any managed accounts — it defaults participants into TDFs.

Non-record-keeper managed-account providers include players such as Envestnet, blooom, Morningstar, Stadion Money Management and Financial Engines, the latter being the powerhouse of the bunch with roughly $160 billion in assets under management.

Financial Engines, founded in 1996, has been in the 401(k) market far longer than the other robos. It traditionally worked only with large 401(k) plans, but announced a partnership with the record-keeping firm ADP in February that brings it more down market into advisers' territory.

"About half of the participants and half of the assets are in the large-plan market, which means the rest are in the small-plan market," said Christopher Jones, chief investment officer at Financial Engines. "It's a natural growth sector, and it makes sense to tackle that part of the market."

Financial Engines, unlike the other managed-account providers, has brick-and-mortar advisory shops and roughly 250 advisers in the field around the country, courtesy of its acquisition of The Mutual Fund Store announced in 2015. Through the firm's Personal Advisor Service, 401(k) participants can get financial planning from a dedicated adviser for a fee of roughly 0.80% to 1%.

"They're a threat to anyone who wants to do individual wealth-management business," Aaron Pottichen, president of retirement services at CLS Partners, said of Financial Engines.


Employers have been laser-focused on plan cost, largely because of the increasing number of lawsuits targeting employers for allegedly excessive fees. Costs are greatest among small plans.

401(k) plans with between $1 million and $10 million have a total plan cost of 1.24%, on a participant-weighted basis, while those with $50 million-$100 million, for example, have a total cost of 0.74%, according to a joint analysis conducted by the Investment Company Institute and BrightScope Inc. in 2016.

By comparison, ForUsAll, which primarily caters to plans with between $500,000 and $20 million in assets, has all-in plan fees ranging from 0.4% to 0.7%, said Mr. Inoue, who previously worked at Financial Engines.

There's also been a nationwide focus on the lack of retirement-plan coverage among small employers. A few states are trying to address the problem through legislation setting up automatic-enrollment, payroll-deduction IRA programs. Many pundits also expect legislation in coming years that would drive down costs and simplify plan management by allowing small employers to band together in a common retirement plan, called an open multiple-employer plan.

Robos, though, are trying to break down barriers by making 401(k) plans as streamlined, simple and cost-efficient for small-business owners as possible.


That said, 401(k) robo-advisers have slightly divergent business models, some more threatening to advisers than others, which may be more flexible.

Human Interest, which launched in 2015, for example, allows advisers to add other funds in addition to the ones the robo delivers to a client. Vestwell, founded last year, allows advisers to toggle its services on or off — it can serve as a fiduciary on a plan's investment lineup and/or administration, and can serve as the plan record keeper or link up with another record-keeping firm, for example, but doesn't have to.

"Where do you best service your client — plan design, product selection, education services? We become the rest of that equation around the adviser," said Vestwell founder and CEO Aaron Schumm.

Advisers can also benefit from robo- technology by leveraging it to scale their businesses, observers said.

Mr. Schumm said his platform, for example, is typically used by 401(k) generalists — advisers who primarily do individual wealth management but want to expand their retirement book of business — and more specialized 401(k) advisers serving large plans who "want to go down stream but can't do it at scale or at a competitive price point."

Mr. Conlon of Betterment said advisers working with employers to develop comprehensive financial-wellness programs for participants can use Betterment as the distribution outlet for those programs.

While 401(k) advisers may also seek to do individual wealth management for affluent participants, advisers can offer managed-account services in a plan so that less-affluent participants are given access to advice, too.

Ultimately, as many financial advisers have seemingly been able to compete with retail-client-focused robos by communicating a unique or distinct value proposition to individuals, there are ways 401(k) advisers can continue to compete effectively so they don't pose a threat, observers said.

"There's always going to be someone coming up with a new idea," said Keith Gredys, president and CEO of Kidder Benefits Consultants Inc. "But it's going to be, to me, just another choice. And how do you differentiate?"

(See other stories from the latest Retirement Plan Adviser here)


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