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Betterment to Join DC Market With New 401(k) Platform

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Betterment announced in September that it is launching a 401(k) platform, Betterment for Business, to offer personalized advice to all participants.

Participants will be able to invest in 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, believes his firm can provide a better user experience for retirement savers and at a lower cost.

Stein 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

While looking for low costs and a “decent participant experience” for Betterment’s employees, Stein said those things were “impossible to find” and expensive to boot. “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 fund 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Outdated technology is also contributing to bloated fees and inefficient plans, he suggested.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.”

Betterment will be able to offer the fees it does because “we’ve done all this work to improve the back-end processes,” he said. “We’re building from scratch a new platform that’s better aligned with our customers. Instead of manufacturing ETFs, we’re able to choose the best ETFs from the market.”

The user experience was a key factor in developing the platform, according to Stein. “Typically most people don’t even know how to log in to their 401(k) plan [provider's platform],” he said.

After finding what those bare-bones 401(k)s were charging for no advice and a poor experience, Betterment sought to make saving for retirement a better experience overall for participants.

“We’re starting with the award-winning Betterment user experience: the mobile apps, the integrated view of all your holdings, all your accounts in one place. It’s intuitive, it makes good sense, it’s easy to access.”

Participants on Betterment’s platform will get advice on how much to save, which accounts to save in, estimates of how much they’ll need to save and whether they’re on track. It’ll also incorporate other sources of income like Social Security benefits and any pensions or outside accounts.

“Everyone should have access to this kind of advice,” Stein said. “In a country where we require people to save for their own retirement rather than provide for it fully, we ought to have access to great advice about how much that means we have to save.”

He said that outcomes will be better, too, because Betterment will be able to look at all of a participants’ accounts, not just the 401(k) on the platform. “Because we’re doing tax management across all your accounts, we can do that better once you have your 401(k) and your taxable accounts with us,” he said. “We can actually get you better returns net of taxes because of the way we manage your money. It’s significant money for you. It’s something that everyone should be doing and it’s crazy to me that no plan has done that before.”

He added that the Department of Labor’s call to apply the fiduciary standard to everyone who provides retirement advice will also help improve users’ experience.

“Whether you’re a broker or a sales person or whatever, that fiduciary standard should apply as it does to real advisors,” he said. “We think that’s a great idea because it would improve the quality of advice and probably reduce the cost of advice for plans and participants across the country.”

When a Crash Comes, Will Robos’ Clients Run?

An oft-repeated critique of robo-advisors is that in a market downturn, there’s no one to hold clients’ hands and keep them in the market.

David Lyon, founder of Oranj, a digital practice management application, has seen that attitude firsthand. When he meets with firms and the conversation turns to robos, “Most advisors’ first reaction is, ‘Oh, wait till the market downturns. Everyone’s going to be running for the doors,’” he told following the increased market volatility in late August. “That’s what happened to eTrade during the recession and everyone moved to cash.”

However, he added, “I think it has to be a bigger dip than a week to really settle in with people’s emotions.”

That appears to have been the case at Betterment. According to Arielle Sobel, a spokeswoman for the robo-advisor, “our customers behaved incredibly well,” with less than 2% changing their asset allocation.

The platform experienced very large one-time deposits from customers, saw a “strong increase” in sign-ups and had a “record week for tax-loss harvesting, which helps our customers when the market drops.”

Lyon noted that the true impact of the recent volatility on robos probably won’t be known until they report their AUM numbers.

“I think the larger issue that a lot of this attention is pointing at is how does it affect the service that people are receiving? How does it affect inflows and outflows?” he said in an interview. “From where I sit, I don’t see it being any different from what Vanguard would experience. The true test over time is whether this is the experience that people are actually looking for.”

He added that the real value robos provide to investors is greater accessibility and convenience. “Robo-advisors do a very good job of presenting their service as a passive way to invest,” he said. “That sets expectations up front. The long-term thing to watch is that as investors are paying more attention and have needs outside their investment portfolio, how are they going to be met?”

For example, as millennial investors on a robo-advisor platform get older and start accumulating assets outside of their investment portfolio, if “you look at what their true needs are, the robo-advisors are only providing value to a quarter of their needs,” Lyon said. “When it comes to retirement planning and other financial planning, whether it’s buying a first home or another home, over time people are going to want more. That’s the biggest risk for the robo-advisor.”

Paul Resnik, co-founder of FinaMetrica, pointed out that investors’ “risk tolerance is generally stable over time and doesn’t tend to fluctuate with changing markets. What changes as markets move is typically investors’ risk behavior driven by their perceptions of risk, not their risk tolerance,” he said in a statement.

FinaMetrica announced in August that it has cut the price of its psychometric risk tolerance test for U.S. consumers to $4 following the market correction.

Resnik added, “If you have a portfolio mix that you agreed to with your advisor when you were in a calm and rational state, then now that markets are volatile is unlikely to be a good time to change that allocation.”


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