Betterment just released a study that challenges the usual practices of employer-sponsored 401(k) plans, already under pressure from a growing number of employee lawsuits and the pending DOL fiduciary rule.
The study, conducted by Forrester Consulting, found that an “overreliance on third parties” like advisors to develop and oversee 401(k) plans poses risks for employers who may not be aware of high plan fees. “Employers must oversee their advisors regularly—and demand transparency on fees as well as investment costs and decisions,” according to the study.
For their part, advisors to plans need “to have a better understanding of plan fees and the tools available to employees to get advice and a closer eye on fund investments,” Cynthia Lo, general manager of Betterment for Business, the robo-advisor’s 401(k) platform, told ThinkAdvisor.
“A lot of plans work with advisors,” said Lo. “Some have the training to advise and design plans. And some manage just a handful of plans…and generate fees from revenue sharing…. The DOL rule will be tougher for them.”
The rule also “raises the stakes for employers leaning on advisors to cover a company’s fiduciary responsibilities,” according to the study.
Based on an online survey of 305 full-time employees at U.S. companies offering a 401(k), plus seven corporate benefits decision-makers, the study found both employers and employees face “knowledge gaps” about 401(k) fees—the total amount of fees, how they’re structured and who’s responsible for paying them.
For example, 16% of employees surveyed said they had no idea what their 401(k) fees were and 57% of employees said they expected to pay less than 1% in fees over the life of their 401(k) plan. The amount “can actually be much higher” and “even 1% can have a significant effect when compounded over the life of the account,” according to the study.
It cited a separate report from Demos, a liberal public policy research and advocacy group, that found the average U.S. household can expect to pay $155,000 in 401(k) fees over a period of 40 years.
Employees also are not clear about who is responsible for decisions made about their 401(k) plans—62% erroneously believed their employer had no fiduciary responsibility for ensuring that financial advice they provided to employees was in the employees’ best interest, according to the study. And more than 50% of employees surveyed were skeptical that their plan provider was acting with the employees’ best interest at heart.
At the same time, the study said employers often have no idea if their employees are on track for meeting their retirement savings goals.
It found the typical annual information session many employers hold for employees is effective for only about 20% of employees.
Betterment suggested “holistic, guided, personalized digital tools” to help educate employees about their 401(k) plans and keep track of all their retirement assets, while providing employers visibility about the retirement savings progress of their employees. More than 80% of employees surveyed were less than “very confident” they would be able to retire when they want.
The study concluded with three primary recommendations for employers:
• Be transparent with employees about fees, investment decisions and fiduciary responsibility—and demand the same from the plan provider. Demand that providers and advisors expose their fees and responsibility to the light of day [in order to] better pass this information on to their employees.
• Embrace third-party advisors, but gain and maintain oversight. Third-party advisors have expertise, industry perspective and knowledge that few plan sponsors can match and can help mitigate fiduciary risk but they are not a “silver-bullet solution,” according to the study. Employers still need to understand these plans so they can provide that knowledge to employees.
• Seek digital money management tools to empower employees to take a more active role in their financial health. The study suggests employers search out providers that provide digital access to employees’ financial information, planning and advice that’s available when and where employees need it.
As of late July Better for Business had more than 200 corporate clients, offering globally diversified index-tracking portfolios as well as personalized financial advice. Betterment has over $5 billion in assets under management but does not disclose how much of those assets are held in retirement accounts.
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