When Betterment recently rolled out the first robo-advisory platform for 401(k) sponsors and participants, CEO and co-founder Jon Stein fired several shots across the bow of the 401(k) industry’s largest service providers, and its cadre of independent RIA fiduciaries.
“We think what we’ve built is how all retirement plans should work, and someday will,” Stein told BenefitsPro.
He also said the advice offered through Betterment’s automated platform, which is modeled on the low-cost ETF offerings already marketed to retail investors, will deliver an extent of “holistic” retirement guidance that participants “very rarely” get under the existing RIA model.
Participants will have access to managed account-like automated rebalancing, with assets allocated to a predetermined risk-profile tailored to specific savings needs.
But they won’t be paying managed account prices, said Stein. Sponsors with less than $1 million in assets won’t be charged upfront fees.
Participants in mega plans with over $1 billion in assets will pay as little as 10 basis points, and fees won’t exceed 60 basis points on assets in any plan.
Those are eye-catching price points. The latest edition of the 401(k) Averages Book, published February 2015, shows participants in small plans with less than $2.5 million in assets pay an average of 144 basis points.
The same plan under Betterment’s platform would pay 60 basis points in fees—what plans with under $10 million in assets will be charged, according to a chart on Betterment’s website.
How will Betterment be able to pull that off?
It will compete as what Stein calls a “full-stack” provider, acting as a plan’s recordkeeper, custodian, third-party administrator, and fiduciary advisor.
In a company release, Betterment claimed it is the first such bundled provider to launch in the past three decades.
Not so fast
Eric Droblyen, president of Employee Fiduciary, a Mobile, Alabama-based 401(k) provider to small and midsized businesses, takes issue with Betterment’s claim that it is the only bundled provider to launch in the past three decades, among other things.
Last year, Employee Fiduciary launched The Frugal Fiduciary, the RIA subsidiary of its core recordkeeping business.
That makes the firm a fully bundled service provider, says Droblyen.
Prior to launching the RIA arm, about 60 percent of the firm’s business was directly sold to sponsors, as opposed to RIA-sold.
Since its founding in 2004, it has been providing back-office support for businesses at what Droblyen thinks are price points that would make even Betterment blush.
The two firms share a similar philosophy in that they each build menus on threadbare indexed offerings.
Employee Fiduciary’s go-to family is Vanguard’s indexed mutual funds. Droblyen said the firm strays from revenue-sharing class funds. The words “active” and “management” are not in its vernacular.
“Betterment seems to be saying that if you are a smaller plan you don’t have economies of scale,” said Droblyen. “That may have been true 15 years ago, but not today.”
He thinks Betterment has failed to realize two things: that providers are already doing what the fintech firm says it will be the first to do; and that Vanguard exists.
Like others throughout the provider space, he questions the necessity, and even the functionality of using ETFs to build the most cost-efficient menus, citing trading complexities and settlement issues.
And he wonders how ETF funds will comply with the Department of Labor’s QDIA disclosure requirements, the complexity of which Betterment and its sponsors may find challenging, says Droblyen.
When those issues were raised with Betterment, a company representative underscored that the platform offers ETFs because they are the cheapest alternative to institutional mutual funds, which are not always available to smaller plans.
And as far as the settlement and trading issues Droblyen and others raise, “intra-day trading is not the goal of retirement plans,”according to a Betterment rep, who added that ETFs avoid unnecessary daily trading costs, meaning participants’ savings won’t go to excessive management fees.
As far as QDIA compliance is concerned, the DOL does not review offerings, Betterment’s rep said, but rather defines three models they can fit in. One of which is the managed account default, the requirements for which Betterment’s options safely satisfy, according to the rep.
How the costs break down
Then there is the matter of cost. Droblyen says Fiduciary Matters charges a $1,500 flat fee for plans with up to 30 participants. That covers recordkeeping and TPA services.
For every participant above 30, the charge is another $20 per head.
Then, another 8 basis point charge is applied to custody assets and another 10 basis points for advisory services.
A plan with 30 participants and $2 million in assets (average account balance about $66,000) would pay a $1,500 flat fee, or $50 per participant.
Add that to the 18 basis points for custody and advisory services, which is $3,600 for the plan’s $2 million in assets, and the plan pays a total of $5,100, or about 25 basis points to have the plan administered.
The 60 basis points Betterment’s website says it would charge for a plan that size translates to $12,000 in total fees paid.
In both cases, those figures do not account for the cost of investments. Betterment participants will pay 10 basis points on its offering of ETF funds.
Employee Fiduciary’s lineup of Vanguard offerings features expense ratios that range from 5 basis points on the Vanguard 500 Index Fund up to 18 basis points on target date funds.
Betterment’s rep said the company takes no profit from the cost of the ETFs.
Droblyen also confirmed that Employee Fiduciary does not draw revenue from its fund lineup. If a participant selects a revenue-sharing fund, that cost is rebated, he said.
There are RIA advisor fans of what Stein and his team are trying to do, even if Betterment’s vision is to one day make current fiduciary advisors obsolete.
Stein’s claim that participants “very rarely” get holistic advice is at least partially right, says Greg Patterson, CEO of The Advisory Group, a San Francisco-based RIA advising on about $900 million in assets, half of which are in 401(k) accounts.
“There are advisors out there that are just selling plans and not servicing plans,” said Patterson.
He thinks Betterment’s 401(k) model will challenge smaller advisors who lack the resources, initiative, or model to address sponsors’ growing needs.
But he is not sold that all he and his team do can be automated.
“We’re delivering creative solutions for our sponsor clients,” said Patterson. “So far, there’s no algorithm that is addressing complex problems businesses face when it comes to plan design.”
What specific problems do he and his team address that a robo can’t? Patterson is not short of examples.
Demographic issues, wellness issues, non-qualified plan design, and balancing contribution rates throughout a plan’s pay scale are a few he rattles off.
“The larger a plan, the more complex its needs are, and the more you need human enterprise involved,” said Patterson. “A lot of what we do is listen. Robos aren’t there yet.”
That said, he expects platforms like Betterment’s will find their way, given what he says are the preponderance of poorly designed plans and excess fees going to proprietary products.
“If the space were one day dominated by RIAs competing with Robos, millions of participants would be better off,” he thinks.
Ripe for change
Barry Ritholtz, founder of Ritholtz Wealth Management in New York City, also welcomes Betterment to the 401(k) space.
“We’re aggressive advocates of reducing fees and removing the confusion from the 401(k) market, and delivering indexed models to participants,” said Ritholtz.
He says his young firm—it just celebrated its second anniversary—is at the outset of channeling its extensive brand reach to the 401(k) market. Ritholtz, an award-winning Wall Street commentator, has teamed with Josh Brown, a popular CNBC commentator and publisher of the blog the Reformed Broker.
“The 401(k) market is ripe for change,” said Ritholtz. He likes the model Betterment and other robos are bringing in the retail space.
But he cautions that the Robo movement’s success in the 401(k) market will greatly depend on how well new entrants negotiate ERISA’s complexities.
On balance, 401(k)s are “overpriced, mismanaged, and have too many layers of fees,” he said.
But he’s not sure technology is ready to flush the most proven RIAs, a role he likens to that of a behavioral counselor’s, from the market.
“There’s a space for fast food, and a space for fine dining,” said Ritholtz.