With the decline of company pension plans, the workplace 401(k) is the best way for employees to safeguard their financial future. Sure, there’s Social Security, but the benefit is rarely great enough to cover all of a retiree's financial needs. Fintech firm Betterment recognized the importance of non-biased financial advice for workers and launched an online 401(k) platform in late 2015.
According to Jon Stein, founder, these are the reasons Betterment entered the 401(k) arena:
- Not enough workers have access to a 401(k) plan.
- Most business cannot afford the cost of a typical 401(k) plan.
- Employees with access to 401(k) plans typically pay too much in fees.
- Most 401(k) plans lack appropriate employee guidance.
For these reasons, the Betterment for Business arm of the company seeks to democratize 401(k) investing. The platform was inspired by the company’s search for its own employee retirement plan in 2014. What Stein found was that the many retirement plan options included confusing and expensive choices along with vast amounts of paperwork, administrative and compliance responsibilities. Ultimately, the fees were astounding. The company found that the average 401(k) plan fee was 1.48%.
Betterment also discovered that employees are seeking not only low fees, but guidance about which funds to choose and how to invest and best meet their retirement objectives. Further inspiring Betterment was a Charles Schwab Corp. survey which found that although 67% of respondents wanted personalized investment advice, only 12% stated that they receive it. (For more, see: Betterment's all-ETF Online 401(k) plan.)
The 401(k) Platform from Betterment
Included in Betterment's 401(k) plan services is RetireGuide, where employees get personalized investment advice. This portal provides holistic retirement planning guidance, tailored to the user’s personal scenario. Betterment for Business participants get help with important retirement tasks such as how much to save, which account type to choose and what investments to select along with how to cut investment costs.
During its first 10 months, the new 401(k) product was adopted by approximately 300 companies. Businesses such as medical, dental, law, architecture and technology firms are signing up for Betterment for Business. A major draw for the 401(k) is the availability of personalized employee advice. Customers range from new start ups to a large $25 million plan that switched to the digital offering, according to a recent InvestmentNews article.
Betterment 401(k) plan participants typically have access to approximately 30 passive exchange-traded funds (ETFs). The plan recommends which funds and in what amounts the employee should invest in. Employees can change their asset choices and allocations online at any time. The available funds include some of the lowest-fee index funds which provide access to the U.S. large, mid, and small-cap value stocks and international developed and emerging markets stocks. Bond fund offerings include U.S. corporate, international, emerging markets and more.
Another feature of the platform is that users can link all of their accounts, even those of their spouse, with accounts outside of Betterment. This allows the investment guidance to best incorporate a holistic view of a user’s entire investment portfolio.
Betterment garnered the 2016 WealthManagement.com award in the “401(k) Retirement Plan Support Services Technology” category. The award recognizes new initiatives, platforms, technologies or industry content that enhances the delivery of retirement planning services. (For more, see: How Does Betterment Work and Make Money?)
The Bottom Line
Robo-advisor Betterment has $6.2 billion in assets under management in its retail, retirement plan and advisor-focused divisions. With the race to serve the large employer-employee 401(k) market, Betterment created a portal that aims to minimize costs and inefficiencies and optimize investment options. (For more, see: Betterment Expands and Reaches for More Advisors.)