Betterment's all-ETF Online 401(k) plan

Robo-advisor Betterment recently made headlines when it announced plans to offer an all exchange-traded fund (ETF) online 401(k) plan. While they are technically not the first 401(k) robo-advisor, they are the first of the major players in the robo space to enter this market. Robo-advisors have made their impact felt in the world of investment advice for individual investors. It will be interesting to see if Betterment’s entre into the 401(k) space can make a similar impact. It will also be interesting to see if other robo-advisors will follow their lead into this market.

What Will They Offer?

According to The Wall Street Journal, “Betterment LLC on Friday said that starting early next year, it will offer companies an online-only 401(k) plan featuring a menu of 13 low-cost stock and bond exchange-traded funds from companies including Vanguard Group and BlackRock Inc. (BLK).” Participants will complete a questionnaire that asks them their age, goals, salary and net worth. From there Betterment’s algorithm will generate a portfolio for them in the same fashion that the site does for current clients. (For more, see: How Does Betterment Work and Make Money?)

Who Will This Appeal To?

The fees charged by Betterment (which exclude the expense ratios of the underlying ETFs) will range from 60 basis points for plans with less than $10 million in assets all the way down to 10 basis points for plans with a $1 billion or more in assets. For plans with less than $1 million in assets there will be a one-time $1,500 set-up fee. I suspect that the main market for Betterment’s service will be smaller plans but this could appeal to larger plans, especially those with a decidedly younger workforce.

In the past, the choices for smaller plans were often sold by insurance companies or brokerage firms and were either wrapped in a group annuity or consisted largely of high-cost proprietary mutual funds. Larger employers generally have a number of low cost options including collective trusts, institutional index and active mutual funds and other options not available to smaller plans. Additionally, a plan consisting entirely of managed portfolios may not appeal to employers with a large workforce with varying needs. (For more, see: What's the Best Robo-Advisor?)

However, smaller employers looking to keep costs down and who want a simple, all-in solution that includes help for their employees might gravitate to a service like Betterment’s. Betterment will serve as a 3(38) plan fiduciary, meaning they assume all responsibility and liability for plan investments. Additionally, Betterment will offer some degree of customization in the plan document, not just a single prototype.

ETFs in 401(k) Plans

To date, ETFs in 401(k) plans have not been a resounding success. Charles Schwab Corp. (SCHW) made headlines in 2014 with its all ETF 401(k) plan but the offering has been slow to gain acceptance in the marketplace. Vanguard, the second largest provider of ETFs, has not seen a great demand for ETFs in the plans it administers either. (For more, see: ETFs for Your 401(k)?)

Some of the advantages of ETFs, such as real-time pricing during the trading day, are irrelevant in the 401(k) marketplace. ETFs are also generally quite tax-efficient, again not a factor for a retirement plan. Additionally, the cost of administering ETFs in plans has to include costs for unitizing the partial shares that will invariably be held by participants. It will be interesting to see how Betterment’s all-ETF offering does. Their emphasis seems to be on the advice side of things. However, the focus does not seem to be on the fact that ETFs are the investment vehicle.

Not the First

While Betterment is the first of the “new generation” of robo-advisors to offer an all-in plan, there are other robo advice services in the market place. Probably the oldest is Financial Engines Inc. (FNGN), a firm that has been around for many years. They are generally an offering within a 401(k) plan. Participants can access their service online via their 401(k) provider and enter required information. Financial Engines will them give them an allocation based upon the investment choices offered in the plan. For a fee Financial Engines will take over the management of the participant’s account on a discretionary basis. With both the free version and the paid versions Financial Engines will take outside investment assets into account in making their recommendations. (For more, see: Robo-Advisors and a Human Touch: Better Together?)

Other Low Cost Alternatives

Alabama-based Employee Fiduciary has been offering low cost administration with access to a wide range of mutual funds on their platform for over a decade. Their fees are very affordable for small companies. ForUsAll is a San Francisco-based company that offers a low cost turn-key solution for small companies. Though not a robo-advisor they walk employees through an online information gathering process that will either place them in the appropriate Vanguard target date fund or if they prefer an allocation made of a limited menu of Vanguard index mutual funds offered. They serve as 3(16) plan fiduciaries and take the administrative burden off of small company business owners. Many of the firm’s senior managers came from Financial Engines.

The Future?

Obviously nobody knows what the future holds. Betterment’s main independent robo-advisor competitor, WealthFront, has not indicated that they intend to offer a robo 401(k) product to compete with Betterment. I suspect that the likes of WealthFront and some of the big financial services firms who are in the traditional 401(k) business may play wait and see in terms of entering this space, or in the case of Schwab and Vanguard, adjust their 401(k) ETF offering. Or, and I’m just speculating, if this is successful I wonder if a major financial services firm might not try to buy Betterment or partner with them for their 401(k) platform. This is not unprecedented with the recent acquisition of FutureAdvisor by BlackRock, which by all appearances was an effort by BlackRock to obtain access to their technology. (For more, see: Wealthfront Versus Betterment.)

I was very impressed with Betterment’s effort in this space after a conversation with a couple their employees working on their 401(k) offering. Based on the questions I posed to them it was clear they have really thought this offering through before going live on Jan. 1, 2016. Time will tell if they are successful, but their 401(k) offering appears to be a solid alternative for companies looking for a low-cost turn-key solution.

The Bottom Line

Betterment’s new 401(k) plan offering has generated a lot of headlines and is a logical progression for robo-advisors. I suspect this is just the first effort among robo-advisors to capture a share of the 401(k) market and others will certainly follow suit. Stay tuned. (For more, see: What's Next for the Robo-Advisor Space?)