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Betterment jumps headlong into the 401(k) business spurred by a conviction that even Vanguard Group is unfriendly to investors in this arena

The New York robo-advisor is going full stack, competing with Fidelity Investments on everything from recordkeeping to financial advice

Friday, September 11, 2015 – 2:22 PM by Lisa Shidler
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Jon Stein: No one has done this since Fidelity came into the space.

Brooke’s Note: Betterment is fighting wars on so many fronts with this 401(k) offering that you almost need a military map. Sure, this announcement signals a move by the robo to graze a green pasture that its chief rival, Wealthfront, has thus far eschewed. The bid also answers a more metaphysical what-now-brown-cow question about what Big Thing Betterment can do beyond fairly basic investment management for consumers — with a parallel bid for that market through RIAs. This 401(k) effort will shut up analysts (and journalists) following robos — for a while at least. But if Betterment succeeds in this subventure, it will do less to subvert its robo-advisory competitors than a world of much better known players in the 401(k) business. That might include the handful of RIAs who specialize in 401(k) plans, as Betterment has no intention of rolling out an RIA-distributed version of this 401(k) offering. But Fidelity, Vanguard, Empower, Voya, Schwab and others will also have to pay heed. See: Fidelity, Vanguard and Schwab have top 401(k) brands but plan sponsors like the service of off-brands better, study shows. Mind you, these players did not get to where they are by accident and this article is full of comments from knowledgeable skeptics who doubt Betterment can succeed. But in Lisa’s interview with Betterment CEO and founder Jon Stein (I listened in) he sounded unfazed and the points he makes are hard to skewer, although I can’t comment with authority on the harsh assessment of Vanguard’s 401(k) offering he offers below. My guess is that observers simply don’t want to get their hopes up as they all express support along with their doom saying. Stein isn’t encumbered by such emotional baggage and the economics of his VC-backed company aren’t the same as that of the 401(k) pioneers. He is offering more advice and better technology for a much lower price. Stein also sees this as a make-your-own-luck play on DOL’s proposal for reform. See: Why Wall Street’s DOL killer threat — that 'millions’ of IRA investors will go unadvised under new rules — is hogwash. Such an inexpensive but quality offering can perhaps anticipate or even help turn the legislative tide, he says.

When executives of robo-advisor Betterment Inc. began shopping around for a 401(k) plan for their employees, the fee-conscious startup zeroed in on The Vanguard Group as a provider.

But vetting the Malvern, Pa. indexing giant was a disillusioning experience with regard to its software’s user-unfriendliness and its pricing, says Betterment’s CEO Jon Stein, and planted the seed of intent to make 401(k) plans a cornerstone of Betterment’s long-term business plan — a plan that has now come to fruition with today’s announcement that the New York-based RIA is diving headfirst into the 401(k) business.

“We’re doing everything,” says Stein. “We’re doing recordkeeping. We’re doing advice. We’re doing the participant account opening. We’re an end-to-end bundled solution and no one has done this [full offering] since Fidelity came into the space.”

In service of this vision, Betterment has hired dozens of new employees from the retirement arena and has rented a new floor in its Silicon Alley headquarters to house them. The 401(k) program will use a built-from-scratch platform and will serve as the recordkeeper, advice-giver and fund-picker. Betterment charges about 60 basis points and the firm will serve as a fiduciary to plan sponsors offering low-cost ETFs on its platform, which the company says is open-architecture.

According to Betterment, Earnest Operations LLC, a San Francisco-based startup aimed at providing low-interest loan programs to college graduates, is the first, and so far only, user of the robo’s 401(k) plan.

“This is a huge undertaking for us,” says Stein. “We’ve been working on it for a long time. We see ourselves as having the best platform for the next century for retirement for financial services.” See: Dimensional Fund Advisors tells RIAs it’s getting active in its quest for 401(k) assets.

Seeking traction

Mike Alfred: They're rolling out the retirement piece because they have to justify the investments they're making.
Mike Alfred: They’re rolling out the
retirement piece because they have to
justify the investments they’re making.

But with big opportunity comes big risk. Retirement industry observers say that odds are that Betterment will stumble as it races to claim a share of a $5.5 trillion pot of honey sweetened by net new assets flowing in with predictable regularity. See: What exactly is doable for an RIA in the 401(k) business?.

Rick Meigs, founder of 401khelpcenter.com in Portland, Ore., is one such skeptic.

“The $5.5 trillion 401(k) market appears to be tempting, but it is highly competitive and mature with many superb and entrenched service providers. It is very hard for a new platform to penetrate the market in any significant way.” See: Empower wins Apple’s $3.5-billion 401(k) account from Schwab.

At the top of the list of Betterment’s well entrenched rivals is Fidelity Investments. Skeptics also point to the well funded efforts by The Charles Schwab Corp.'s CEO Walter Bettinger to leapfrog Fidelity by developing the technology needed to invest in exchange traded funds and by cutting out expensive plan consultants.

“Look at Schwab and even with their muscle and years playing in the 401(k) market, it seems like it’s been tougher sledding than they thought to get their index products into the market with any traction,” says Mike Alfred, co-founder of BrightScope Inc., a La Jolla, Calif.-based 401(k) tracker. (The San Francisco-based recordkeeper, hoping it could rely on the power of its Schwab brand, is now backpedaling to court plan consultants.) See: After cutting 401(k) middlemen out backfires, Schwab cuts them back in.

Stein rejects the Schwab comparison saying Betterment’s efforts are a different thing altogether.

“We choose the best ETFs in every asset class,” he says. “We’re talking about apples and oranges. Our offering is totally different. Nobody has ever done integrated advice. It’ll be the lowest cost in the 401(k) plan and there is nothing else like this today,” See: How giant advice provider Financial Engines can sweep the 401(k) field — or not.

Risk-averse players

But market entrants often end up dining on humble pie because of the peculiar 401(k) distribution structure that has the employer positioned between the plan provider and the consumer of the product, the plan participant, according to Alfred.

“It’s more complicated than working with consumers. You’ve got consultants, advisors. And it’s the plan sponsor a lot of times who makes the decision, and they are risk-averse.” See: The great 401(k)-or-not debate: RIABiz webinar lays out the perils and rewards for RIAs thinking of wading into the fast-moving 401(k) stream.

Schwab Spokesman Greg Gable declined to comment for this story but did say the Schwab Index Advantage program has $10 billion in assets with 135 plans signed up and 250 plans in some stage of conversion or adoption — seeming to indicate that his company is not accepting the verdict of observers. See: “Why I moved my account from Schwab’s RIA and what Chuck could do to improve Schwab Private Client See: Schwab garners $4 billion in index-only 401(k) assets fast out of the gate.

No hard feelings

Betterment isn’t just taking on Schwab, of course, but also the king of the retirement industry, Fidelity Investments. The nation’s leader in the retirement business and the top recordkeeper, Boston-based Fidelity currently manages $1.2 trillion in 401(k) assets with 21,660 plans and 13.5 million participants. See: Fidelity Investments wins huge in the 'biggest 401(k) case in decades’ — but bearing battle scars.

Betterment works closely with Fidelity RIA custody clients who want automated investment management for all or part of their practices. And even though this new program now pits Betterment 401(k) offering against Fidelity’s, Stein says his firm’s relationship with Fidelity has not suffered.

“We’re still working very closely with Fidelity. I look at this as a better and more modern way for everyone to save for retirement in their employer sponsored plan. It seems it’s been a long time coming and it’s taken us years to get to the point where we feel comfortable to put resources behind the business.”

Fidelity spokeswoman Nicole Abbott agrees that Betterment’s program doesn’t impact the partnership.

“We believe it’s important for businesses of all sizes to offer retirement programs for their employees. Our focus at Fidelity is on providing businesses and their employees 401(k) plans that will help them achieve their desired outcomes. This offering from Betterment is distinct from the relationship we have with them on the institutional side.” See: Fidelity Investments recognizes power of RIAs in 401(k) market and has increased efforts to work with advisors.

Alley vs. Valley

Will Trout: A firm with a lousy -- or no -- 401[k] plan enters the talent wars with one hand tied behind its back.
Will Trout: A firm with a
lousy — or no — 401[k]
plan enters the talent wars with
one hand tied behind its back.

Fidelity aside, the retirement industry is already home to a giant robo-advisor firmly entrenched in the retirement arena, Financial Engines. See: How giant advice provider Financial Engines can sweep the 401(k) field — or not.

But Stein is convinced that Betterment brings far more to the table than the Palo Alto, Calif.-based firm.

“Financial Engines is not providing underlying recordkeeping and they’re not doing the account openings. They’re just providing an advice layer and you have to purchase that advice layer on top of everything else,” he says.

Financial Engines has 60% market share among the defined contribution managed account sponsors, having grown assets 24% in the last two years to arrive at $109 billion in 2015. Currently, 600 large firms offer advice from Financial Engines to their employees. The median Financial Engines managed account member portfolio balance is about $58,000. See: Financial Engines more than doubles its share price by defining a niche in the 401(k) market between target date funds and RIAs.

A Financial Engines spokesman declined to comment for this story.

'Impossible to use’

Stein says his firm’s brand new technology will be a marked improvement over the older models that most employers are currently suffering under.

“When we started looking for a 401(k) plan ourselves, we were just overwhelmed by how expensive and how bad the funds are and how bad the interfaces are today. There was no good option. We settled on a Vanguard offering powered by Ascensus, but it’s not a one stop-shop. The participant website sucks and no one can figure it out. It’s impossible to use.” See: What led to Vanguard allowing its 401(k) plan sponsors to shop around for non-Vanguard target-date funds.

Vanguard spokeswoman Emily White says her firm is recognized as a leader of defined contribution plans and that the company has deepened its commitment to such plans by investing resources in improved technology as well as new tools for plan sponsors and participants. Vanguard’s traditional 401(k) business works with more than 6,300 defined contribution plan sponsors and more than 3.9 million participants. See: Fidelity, Vanguard and Schwab have top 401(k) brands but plan sponsors like the service of off-brands better, study shows.

“Vanguard collaborates with sponsors to build thoughtful, streamlined plans, fueled by robust analytics that can help inform plan sponsor’s decisions and provide better insights into their plans,” she writes in an email.

Any size, any time

Vanguard has traditionally served large and midsized employers but with the realization that smaller firms like Betterment were underserved, Vanguard launched its 401(k) service for small businesses in 2011 and that group alone has 4,000 plans and 162,000 participants. Vanguard carefully selected Ascensus, she explains.

“This partnership enabled Vanguard to provide state-of-the-art DC plans to small businesses at a very low cost. Ascensus has been in business since 1975, and is one of the largest independent recordkeepers/administrators for small to mid sized retirement plans. This service is differentiated by Vanguard’s low-cost funds, transparency and investor advocacy. The comprehensive nature of the service and its straightforward costs provide a simple way for the sponsor to deliver the benefits of a world-class retirement plan to its employees. And, as we have for more than 30 years, we will continue to evolve and improve the model, taking into account the valued feedback of our clients and shareholders, and leveraging our expertise, decades of experience and leadership in the DC industry.”

Even so, myriad 401(k) problems faced by employers made Stein realize his firm couldn’t rely on any third-party solutions.

“It’s a mess of a landscape and there’s been no new technology since the beginning of the 401(k) plan,” he says adding that daunting expenses in mind, some companies refuse to do recordkeeping for smaller firms. Stein says his firm is open to all sizes of plans but certainly smaller plans will likely gravitate to Betterment’s offering at first.

“I think we can manage any plan. I think realistically the early adopters will be small to medium businesses. We think it’s going to be a great offering. The larger you are the more you save in fees.” See: 9 things advisors to 401(k) plans must do to keep clients out of hot water.

Robo rivalry

Lou Harvey: The major players today have a solid hold on these more profitable plans and avoid the small businesses because they are uneconomical.
Lou Harvey: The major players today
have a solid hold on these
more profitable plans and avoid the
small businesses because they are uneconomical.

Brightscope’s Alfred says busting into the 401(k) game won’t be nearly so easy as Stein makes out.

“It interests me that there are so many people in the Bay Area thinking retirement plans are a good area to disrupt. This is an old-school business and the plans are really sticky. Usually, there is an advisor involved in the small-plan market.” See: New DOL rule effectively kills off open-architecture option favored by some big plan participants — and sets off the 401(k) industry.

Alfred suggests that Betterment’s entry into the 401(k) business may be motivated by a desire to one-up Palo Alto-based Wealthfront Inc. and other robo-advisors as competition among those venture capital-backed firms hits a fever pitch. See: Wealthfront CEO flames Betterment’s 'outrageous’ fees and 'abhorrent’ ways; Betterment strikes back labeling the screed a Trumped-up PR play.

“You have to consider their motivation,” he says. “They’ve raised so much money. They’re killing each other in terms of acquiring the next clients. They’re rolling out the retirement piece because they have to justify the investments they’re making. I think it’s a good move, but I think it’s justified by their internal need for growth and less because there is a huge need in the small-plan market. I think a number of other plans are already bringing the costs down in the space.”

Stein responds via email: “The 401(k) space is not a 'quick’ business. It typically has long sales cycles and is obviously very competitive. This is more about being able to serve substantially more customers with a better way to save for retirement. Our focus is on building a long-term, standalone company that will serve millions of customers.”

Wealthfront spokeswoman Kate Wauck declined to respond to a request for comment about whether her employer, whom many regard as Betterment’s biggest foe, is eyeing the 401(k) market. See: After Schwab and Betterment catch up to Wealthfront’s AUM, the Palo Alto robo pioneer makes a stunning hire.

But one robo-firm that is also making a play on the 401(k) arena is NextCapital, says its co-founder Rob Foregger. But Foregger says his firm’s strategy different than Betterment. NextCapital isn’t a recordkeeper and is much more focused on the larger plan space.

“The more important point, however, is that both NextCapital and Betterment are serving a huge market that needs scalable, automated and personalized advice. This defined contribution industry is ripe for change and a solution beyond target date funds,” Foregger writes in an email.

Tight grip on small plans

Though Stein’s motivations can be questioned, the failings of the 401(k) business that Betterment seeks to correct are indisputable, says Will Trout of Boston-based Celent.

“Jon Stein is right about the poor user experiences, high costs, and a clear lack of advice delivered to plan participants. He’s also right that these shortcomings weigh on plan sponsors insofar as they expose these employers to fiduciary liability and weaken their attractiveness to potential new hires,” he writes in an email. “The 401(k) has become a critical tool for employee recruiting and retention and a firm with a lousy — or no — 401(k) plan enters the talent wars with one hand tied behind its back.”

But, Trout adds, Betterment needs to exercise patience because many millennial, the clients most receptive to online innovation, aren’t focused on retirement yet. See: A New York Times article gets real on the topic of marketing to millennials.

Betterment has a good chance at making waves in the small-plan space, says Louis Harvey, CEO of Dalbar Inc., a financial services market research firm in Boston.

“Betterment can shake things up in the small business startup plan market where the penetration is very low. I don’t think they will make much of an impact with large and midsized plans that are well serviced today. The major players today have a solid hold on these more profitable plans and avoid the small businesses because they are uneconomical.”

Putting aside a host of caveats based on past failures, Meigs agrees that there is cause for hope in this case.

“The one 401(k) market segment that continues to be underserved is small business plans. The Betterment offering could be very appealing here if they can find a cost-effective way of reaching and selling to this segment. I love seeing new players like Betterment in the market with their fresh ideas and approaches to the complex issues facing plan sponsors and the American worker.” See: An attorney explains where the 'trail goes cold’ in PBS’ 'Retirement Gamble’.

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Mentioned in this article:

BrightScope, Inc.
Data and ratings for RIAs

RIA Publication
Top Executive: Rick Meigs

Betterment, LLC
Financial Planning Software
Top Executive: Jon Stein



September 11, 2015 — 3:18 PM

Good luck to Betterment and I hope they can come forward with a great offering for small business.

A few observations;

Good technology is necessary but not sufficient to do a good job of recordkeeping, administration, compliance and participant services.


“We choose the best ETFs in every asset class,” he says. “We’re talking about apples and oranges. Our offering is totally different. Nobody has ever done integrated advice. It’ll be the lowest cost in the 401(k) plan and there is nothing else like this today,”

How are ETF’s the best idea for a 401(k) plan? Is Betterment going to do intra-day trading in these plans? If not, will they guarantee the end of day price? How does Betterment know what the best “ETFs in every asset class” are? Does that change over time?

On pricing, 60 bps won’t be nearly enough on many plans, and way too much on others. How will they handle very small, startup plans?

The industry needs new ideas and disruption, but the statements from Betterment seem to betray a basic lack of understanding of how 401k plans actually work.



September 12, 2015 — 3:17 PM

I guess if you whiff by the suggestion that existing web user interfaces are “unusable” or too hard to deal with, you might have something here. However I’ve been using vangard, fidelity and schwab for decades and they’re just fine.

The other end of it is that if you’re using your retirement account web site so often that its usability is a key issue involving your retirement, you’re doing it wrong.

And this is another one of those 'robot’ investor systems that tries to get you in and out of the market on 'signals’ using a 'system’. If the signals and systems worked, the people who developed them would be sitting on yachts contemplating which summer home they’d stay at in the coming week and whether to fly their jet into the nearby airport or just take the helicopter straight there. Not selling retirement plans to people for a skim.



September 11, 2015 — 7:48 PM

It is a more than a a bit puffery to suggest they are the only provider with this model. There already are other similar solutions including one we refer our clients to, Americas’s Best 401k. I learned of them through their partnership with Tony Robbins. As an advisor that has many 401k clients and worked with many recordkeepers, for them to think they can profitably provide complete admin, recordkeeping and advisory services for 60 bps, not going to happen. certainly not “profitably”

Jack Waymire

Jack Waymire

September 16, 2015 — 5:05 PM

The Betterment service is spot-on for 401k participants with smaller account balances. Market performance for low fees will help them accumulate more assets.

However, Betterment is pushing a very big rock up a very steep mountain. Betterment will need a brilliant, low cost solution to get trustees’ attention. Most trustees prefer brand names because they believe it reduces their fiduciary liability. No matter how good the service, they will be reluctant to buy from a new service provider.

And, this service will have to be sold. Digital marketing will not get the job done.

But, Betterment should know all of this.

Bill Winterberg

Bill Winterberg

September 13, 2015 — 6:50 PM

To much fanfare at Finovate Fall 2012, Personal Capital announced its own 401(k) offering priced at 50 basis points, 16% cheaper than Betterment’s offering.

But now when you visit personalcapital401k.com, it redirects to Americas’s Best 401(k) website.

What does that tell you?

Brian Murphy

Brian Murphy

September 13, 2015 — 7:30 PM

From my understanding Personal Capital pulled out of the 401(k) space due to investor concerns. (Look at the investor list and then make an educated guess on which of these investors might have a concern.) The business was passed onto America’s Best 401(k). They’ve done a great job there.

Another up and comer is ForUsAll – they’re also doing it right. The team, primarily ex-Financial Engines, has a pre-defined low-cost fund lineup, aggressive pricing and is teamed with Lincoln on the backend.

I’d suspect Betterment will approach one, or the other, at some point in their efforts.

Chuck DelFrisco

Chuck DelFrisco

September 30, 2015 — 10:49 PM

Does this even make sense? I guess when you have a bunch of VC money sitting around, maybe anything makes sense. So they investigated the 401(k) business, determined that it is lacking sorely, so figured they would go hang their hat as the next big thing and do it better than everybody else. Wishful thinking. Do the DOL & IRS like to play around with robots? What about all of the fiducairy potholes that await a recordkeeper, advisor, etc? No, they’ll just hire the talent, ERISA lawyers, etc. VC money baby! Enjoy the ride!

Is it a cost-conscious move to rent our another Silicon Valley office building floor (inexpensive comes to mind) and build out a retirement team? Isn’t this a big stray from the direct to consumer business model? It’s not as though the rank and file investor they target now, is the decision maker when it comes to a company’s 401(k).

And how about the ETF’s as the investments? There’s a reason they haven’t caught on in the 401(k) marketplace. You are going to allow participant’s, who are for the most part ill prepared to handle their investment decisions, to have intra-day trading? Ok. But talk about a logistical nightmare. Add to that the bid /ask spreads and this is supposed to benefit the average investor? How so? If your just allowing end of day trades, then what is the point of ETF’s? With Admiral and Institutional Vanguard and other company share classes, fees can be brought down significantly using standard mutual funds.

As for the technology, I guess Betterment needs to put their engineer’s to work on something. “Build this out, I want all the bells and whistles, graphics that play to the millennial mindset, yada, yada, yada!” Oh boy! You then hammer Vanguard and Ascensus. What’s wrong with the Ascensus/Vanguard interface? You login, it takes you through a retirement goals and whether you will attain them section, you can buy or add funds, select a model if one has been formulated for your plan, see your performance, pull your statements and the list goes on. You have got to be kidding that all the rocket scientists at Betterment cannot figure this out right? And what more exactly is needed? Isn’t this investment you speak of a “set it and forget it” type of setup? Shouldn’t your 401(k) consist of five models (maybe more) that map according to your plan’s population (to versus through?) and then boom they are automatically enrolled? What exactly would your participant population have trouble with? Entering their beneficiaries upon their initial login? Weird assessment here Mr. Stein.

Lastly it brings me to this whole VC money thing. More power to these guys that they have been able to raise such mass amounts of capital. but the numbers continue to not add up. Eventually the roosters will come home to roost. It’s just a matter of time. Just ask Mr. Alfred. His backers must be chomping at the bit right about now.

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