Betterment announced today that it is launching a 401(k) platform, Betterment for Business, to offer personalized advice for all participants.
Participants will be able to invest in a globally diversified portfolio of index-tracking ETFs, and open other investment accounts, IRAs and trust accounts alongside their 401(k). Betterment will also provide tax management for all of a participant’s accounts.
The new platform will be available to firms of all sizes beginning in the first quarter of 2016.
Jon Stein, founder and CEO of Betterment, said that creating a 401(k) platform has been a goal of Betterment’s “since Day 1,” but came second to other priorities until the firm tried to set up a 401(k) for its own employees.
“We found the process to be so cumbersome and the end result so unsatisfactory that it raised this to the top of our priorities,” he told ThinkAdvisor on Wednesday.
If an established financial services firm has difficulty navigating the 401(k) market, what hope do investors have?
“We’re pretty sophisticated. We have an investment team in house, we know what we want — we want low costs, we want a decent participant experience — and we found those things impossible to find,” Stein said. “The plans that are out there are expensive. Even the plan that’s the cheapest we could find on the market was something like 82 basis points all in. For that you ought to get a lot. You ought to at least get some good services or user experience, but no, that’s the bare-bones product with no advice for participants and no user experience and no coordination with outside assets, nothing.”
Fees on Betterment’s platform will be based on assets under management and will range from 10 basis points for small plans to 60 bps for the largest plans, Stein said. Sponsors who have more than $1 million in assets will have no upfront fee.
“These are most likely the lowest costs in the market,” he said, noting that a “typical plan costs something like 1.5% per year, maybe it’s 2% per year,” with some large plans offering mutual funds that cost “50 basis points or more and then fund management costs of another 1% on top of that.”
“It’s a really backwards, fee-laden industry,” Stein said.
Outdated technology is also contributing to bloated fees and inefficient plans, he suggested. “The legacy firms were built on technology from 30 years ago. They don’t even know how to handle ETFs. They’re built on mutual funds and they’re built on these old conflicts of interest and old technology.”