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

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.

ETFs?

“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.

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”

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.

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?

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.

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.

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.