Rocking the retirement game
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11 September 2015
Jon Stein of Betterment is right when he notes the “poor user experiences, high costs, and a clear lack of advice” that characterize the 401(k) plan business today. These failings are particularly noticeable in the small company plan arena, as I noted in a recent blog post. Stein also is spot on that these shortcomings weigh on plan sponsors insofar as they expose these employers to fiduciary liability and weaken their attractiveness to potential new hires. The Betterment platform is a solution to a real problem, in short. That’s good news for fans of the NY-based automated advisor, which is running neck and neck in the AUM game with West Coast rival Wealthfront. The rub is that the small plan retirement space, while underserved and highly fragmented, is hardly virgin terrain. Over the last five years, a host of digital-first plan providers such as Employee Fiduciary, Capital One Investing (formerly Sharebuilder 401k) and DreamForward Financial have launched low cost, user friendly 401(k) platforms targeting small businesses. According to spokesman Joe Ziemer, the Betterment platform is well, better. That’s largely because it can deliver a full range of integrated plan services (e.g. recordkeeping) that have been developed in-house, resulting in a more seamless user experience. Unlike bolt-on retirement advice services such as managed accounts provider Financial Engines, the Betterment platform offers personalized advice (at the asset allocation level) within the plan framework. Neither the technological capabilities nor the ERISA knowledge required to build and maintain such an end-to-end platform come free, of course, and Betterment has been on a hiring binge. Leading the charge to 401(k) Valhalla has been recent addition and established ERISA consultant Amy Ouelette. The human and technical resources involved in building what Betterment terms a “full stack” platform means it is unlikely that other automated advisors will follow suit. Of the pure play robos, only Wealthfront could conceivably afford to make this kind of investment, and they’ve shown zero interest in deviating from the direct to consumer approach they’ve followed since day one. For Betterment, of course, the launch of a platform targeting small business only underscores the degree to which the firm has pivoted from B2C to the B2B game.
Though the Betterment announcement contained more than a few audacious statements, I think it's interesting if the only thing it does is stir up competition and activity in the small plan space.
A critical flaw in Betterment's pitch, and one that almost the entire money management industry gets wrong time after time is the underlying assumption that most plan participants want investment advice. The data shows that they don't.
We have a fully integrated retirement planning/investment advice offering from Newkirk called AdvicePlus! (Our RK system passes participant, plan and account data to AdvicePlus and accepts transactions back from AdvicePlus.) Across our client base (750 plan sponsors, 185k participants, $12 Billion) about 20% of the Plans choose to offer the this service. Less than 10% of participants who have access to AdvicePlus actually use it in a given year.
If Betterment thinks that investment advice is the thing most lacking in the small plan market, I think they have the bullseye in the wrong place.
The small plan market needs robust, reliable RK, administration, compliance and participant service at a price they can afford. Will Betterment be happy to collect 60 bps on a startup plan with $150k of cash flow a year? Seems unlikely.