Robots are coming for your 401(k) business. Automated investing provider Betterment caused a stir in September when it announced a plan to target the 401(k) plan market. They made good on Wednesday with the official launch of Betterment for Business. The new 401(k) platform, which uses technology and includes personalized investment advice for all plan participants, is now live for a charter group of plan sponsors and participants.
“Since Betterment launched in 2010, our mission has been to improve the way people save and invest through smarter technology,” Jon Stein, founder and CEO of Betterment, said in a statement. “Today, we’re excited to enter a space that is in need of innovation and smarter technology. Betterment for Business is the only turnkey 401(k) service that includes personalized investment advice for all plan participants. The era of expensive, impersonal, unguided retirement saving is over.”
Boxed, a New York-based mobile wholesale shopping app, has signed up as a plan sponsor and rolled out the Betterment for Businesses 401(k) offering to all of their employees.
“At Boxed, we’re a technology company at heart, so working with Betterment is a natural fit for us,” said Chieh Huang, CEO and founder of Boxed. “We are thrilled to able to provide our employees a true cost-effective benefit and help set them up for retirement.”
Boxed has previously been recognized for their employee benefits, including paying for the four-year college tuition of their employees’ children.
“When we announced Betterment for Business earlier this year, we anticipated the response we’d received from companies would be high, but we’ve been blown away by the reception,” said Cynthia Loh, General Manager of Betterment for Business. “This reaffirms our view that plan participants and plan sponsors want a 401(k) that is easy to use, low cost, and includes investment advice.”
Betterment for Business has formed an advisory board and its first two members are Thomas E. Clark Jr. and Ray Kanner. Thomas E. Clark Jr. is Of Counsel at The Wagner Law Group, a law firm specializing in ERISA & employee benefits. Earlier in his career, Thomas worked for the law firm of Schlichter, Bogard & Denton on such landmark cases as Tibble v. Edison, which was decided by the U.S. Supreme Court last year. Ray Kanner heads IBM’s global pension and savings system, one of the largest systems in the United States, overseeing approximately $140 billion of assets.
Participants enrolled on the Betterment for Business platform are invested in a globally diversified portfolio of index-tracking exchange-traded funds (ETFs) and benefit from personalized advice in a goal-based investing framework. The Betterment platform currently serves more than 130,000 retail customers. Participants will also be able to easily open and customize taxable investment accounts, traditional and Roth IRAs, and trust accounts-and view all of them alongside their 401(k) accounts. The accounts will be intelligently managed, together-a service that few other providers in the market offer.
In 2015, Betterment was announced as a launch partner with the Social Security Administration’s initiative to integrate participants’ Social Security benefits into their retirement planning.
Consistent with Betterment’s retail service, Betterment for Business aims to lower costs and offers a simple, easy-to-understand fee structure, with no upfront fee for plan sponsors with more than $1 million in assets, and an assets under management-based fee ranging from 0.10% to 0.60%.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
You know, when I first saw all the attention Betterment was getting over their 401k launch I was mad – our firm has been delivering low cost 401k plans to small businesses for years and John Stein was talking like he invented the 401k plan during his press tour. I’m no longer angry – I just don’t see how the Betterment 401k product succeeds:
Reason #1 – Vanguard target date index funds
Today, participants in any-sized 401k plan can earn market returns with professional portfolio management by using Vanguard target date or target risk index funds for less than 0.20% per year. That beats the 0.70% per year 401k participants would pay for Betterment managed ETF portfolios (0.60% Betterment fee + 0.10% EF investment expense). Betterment clients with under $1M in plan assets will pay an additional $1,500/year.
Now, I’ll agree that most small business 401k plans pay more today than what Betterment charges, but they don’t have to. Our firm provides asset custody, participant recordkeeping, third-party administration services with a Vanguard fund lineup for under 0.40% per year. That’s less than half what Betterment charges – and we’ve been in business since 2004.
Reason #2 – Overhead
The number #1 rule in delivering low cost 401k services is minimizing overhead. Betterment isn’t doing that. They’re a highly leveraged company doing business in an expensive city – NYC. You need to sell a heck of a lot of small business 401k plans to overcome that sort of overhead.
Reason #3 – Experience
In their Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan, the DOL says “selecting competent service providers is one of the most important responsibilities of a plan sponsor. The process of selecting service providers will vary depending on the plan and services to be provided. To assist business owners in carrying out their responsibilities under ERISA to prudently select and monitor plan service providers.”
Choosing a startup 401k provider w/ new employees and untested recordkeeping and trading software doesn’t sound prudent to me.
While I don’t like the Betterment 401k product, I am grateful it launched – it has raised the profile of other small business 401k providers with better value propositions and experience. Years ago, small business 401k plans were stuck with high-priced insurance or mutual fund products. That’s changed in recent years. Today, plans of any size can access low cost administration services and investments. They just need to know where to look.
Well said Eric. I just ran some numbers of my own and their reasonably priced plan might soon become very expensive. ALL of the Betterment 401(k) fees are asset-based. Assuming they are still around in a few years, their plan will likely have grown, maybe substantially so. When that happens, they’ll see a parallel increase in the plan fees. With the Vanguard plan they use for comparison, only the fund expenses are asset based, and Employee Fiduciary’s asset based fee is very low, so as the plan grows, total fees as a percentage are going down.
That leaves plenty of funds to hire a qualified fiduciary plan advisor that might help them avoid pitfalls like the Betterment plan!