Robo-Advisors' Next Frontier: 401(k) Plans
The 401(k) plan market is one of the biggest pools that financial and retirement advisors looking for assets can fish in today. With nearly 75 million Baby Boomer workers nearing retirement, the need for financial advice and assistance with rollovers is looming like a tidal wave for planners and brokers.
These factors have combined to make this market attractive for the new and rapidly growing niche of robo-advisors that have appeared in the past few years. But while their entry into this arena was almost inevitable, these automated providers will have several major hurdles to overcome before taking over the market. (For more, see: Is a Google Robo-Advisor on the Horizon?)
How They Work
Automated investment advisors can provide basic money management services to clients without the need for human intervention. These services are performed by computer programs that are designed using complex algorithms and reams of historical market data, and they are written to buy and sell securities in accordance with market performance in order to achieve a particular objective.
In most cases, they offer a range of automated portfolio models ranging from conservative to aggressive or that seek to achieve more sophisticated objectives, such as tax-efficient capital growth. These programs can also rebalance portfolios, harvest tax losses and take care of other routine money management chores that could previously only be performed by humans.
The popularity of these programs is growing rapidly, but they have thus far been largely available only to retail investors or IRA holders.
The Next Step
Although robo-advisors do well with managing individual clients accounts in a retail setting, servicing 401(k) plan customers will be another matter. 401(k) and other qualified plan administrators are required to adhere to strict fiduciary requirements when managing their participants’ funds, and this can involve considerably more than following a set of algorithms in most cases. Most of the current robo-models in use today would have to be recalibrated to provide a much greater level of individualized service that meets fiduciary standards. (For more, see: What's the Best Robo-Advisor?)
Nevertheless, companies that employ these programs such as Financial Engines and Betterment are either already engaged in dealing with 401(k) customers or plan to begin shortly. Of course, these firms will have to make some major internal changes in order to do this successfully, and will likely have to implement a team of dedicated professionals who focus exclusively on this market.
Another key drawback that they will likely have to contend with is the lagging level of general technology that seems to pervade the retirement plan market. While retail and IRA investors often have instant access to cutting-edge technology that allows them to view and manage their accounts around the clock using a virtually unlimited range of investment choices, platforms and programs, many qualified plan participants are still only accorded a very basic level of products and services, and may not have an advisor of any kind to turn to either through their employers or elsewhere.
Robo firms that want to be competitive will therefore be wise to create automated platforms and services that can bridge this gap effectively. The product that Betterment intends to roll out in 2016 will feature a digital dashboard that employers can use to sign their workers up and monitor plan activity. Meanwhile, employees will be able to view and manage their accounts using the latest technology, which will also allow them to add all of their other accounts and plans into the portal and provide them with an integrated snapshot of their entire portfolio at a glance. (For more, see: Betterment vs. Financial Advisor: Which Is Best?)
Financial Engines has modified its software to provide a more personalized level of advice for plan participants that meets ERISA standards and can genuinely help participants who use it to accurately determine and then achieve their financial and retirement goals. Betterment intends to offer a similar tool in the near future by having participants go through an extensive online interview process that will help them to see where they are now and what they will need to do to get where they want to go. Perhaps one major benefit that robo-advisors can promise that may entice employees to join is paperless enrollment, recordkeeping, administration and statements. And as with their retail platforms, these automated services will probably also be able to do this at a (sometimes considerably) lower cost.
The Bottom Line
Despite the lower cost and technological efficiency, it will most likely take the robo-advisor companies several years to make a real impact in the retirement plan market. The hurdles mentioned above coupled with current pending legislation regarding the fiduciary standard for financial planners may make this a difficult entry for some of them. The lure of easier business in other areas of finance such as lending and insurance may also make the retirement market less attractive for some firms. For more information on robo-advisors and whether one may be coming to your 401(k) account, visit the Financial Planning Association website at www.fpanet.com or consult your financial advisor or company plan administrator. (For more, see: Top 5 Robo-Advisor Myths.)
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