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 midsize 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.