A study commissioned by Betterment for Business, the 401(k) service provider arm of New York City-based robo-advisor Betterment, suggests technology as a fix for a 401(k) system marked by participants’ broad confusion and lack of confidence in their retirement prospects.

Half of the participants surveyed expect 401(k) savings to be a significant source of retirement income, far more than is expected from any other source, such as a traditional pension plan or Social Security.

Despite understanding the vital role respondents expect 401(k)s to have in retirement, a quarter had little or no confidence in their ability to retire on time. Only 17 percent reported being very confident in their ability to retire on time.

The survey classified respondents as “savvy” and “less savvy,” depending on whether or not they actively track financial accounts and have a financial plan in place.

Both groups reported confusion over what they pay in plan fees. Among savvy investors, nearly one quarter were under the impression they don’t pay any fees on their plan; another 14 percent of savvy investors said they did not know what fees they paid, and 40 percent expect to pay less than 1 percent in fees on their 401(k) assets throughout their working career.

Much of that confusion can be explained by the incumbent approach to education programs backing the typical 401(k) plan, said Cynthia Loh, general manager of Betterment for Business.

“Employers often have someone come on site once a year so they can check the box saying they’re providing education,” said Loh in an interview. “But a once-a-year session is going to do little to help participants reallocate their portfolios.”

Survey results

Betterment surveyed seven employers and human resource managers, who said the most common way they try to influence participants’ saving habits was through annual or quarterly education sessions.

But 40 percent of the employees in the survey said they didn’t have access to the education sessions or didn’t know if they were available.

Overall, only 37 percent of employees said they attend the education sessions — only six in 10 with access to education seminars took advantage of them, and just over half that do access the sessions said they found them valuable.

Loh, who was hired by Betterment last year to run the institutional side of the robo-advisory, which recently surpassed $5 billion in assets under management for both its retail arm and its 401(k) platform, sees technology as the lynchpin in addressing a system that overall is failing to prepare workers for retirement.

“With our platform, every employee gets access to our advice and our technology. Every employee gets access to a managed account platform,” she said.

Participants are exclusively invested in low-cost, nonproprietary exchange-traded funds, which is how Betterment competes on cost. Sponsors with at least $1 million in assets are not charged up-front fees, and participants pay between 10 and 60 basis points to have their retirement assets managed on the Betterment platform, depending on the size of the plan.

A 2014 report by Deloitte Consulting and the Investment Company Institute, a trade group that represents the mutual fund industry, found participants in plans with up to $10 million in assets paid an average of 127 basis points, or 1.27 percent of assets in accounts.

Plans with up to $100 million assets averaged 82 basis points in fees, while plans with up to $500 million averaged 57 basis points, and plans over $500 million averaged 37 basis points in participant fees, according to Deloitte and ICI.

Loh says sponsors hold the key to addressing employees’ ambiguity over the costs of investing in 401(k) plans.

“Sponsors need to demand fee transparency,” said Loh. “Technology is moving the needle across every industry. Getting participants personalized advice through a digital platform can deliver solutions to the savers that most need it.”

Instant Insights /

Study: Even savvy participants clueless on 401(k) fees

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