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 Two of the leading companies in online investment advice launched
initiatives this month aimed at getting more personalized financial
advice to workplace retirement savers.
Betterment, a leader in the “robo-advisory” automated portfolio
market for retail investors, announced plans this month for a new
technology-driven offering for 401(k) plans.
Meanwhile, Financial Engines - the current leader in 401(k)
financial advisory services - is giving more workers access to its
network of human advisers.
Robo-advisory services like Betterment have been focusing on the
retail market, helping people manage their IRAs and taxable
brokerage accounts. These services use algorithms to select a mix of
investments based on your tolerance for risk and other preferences,
and then automate the account management.
Betterment ( http://betterment.com ) reports that its client base
has more than doubled just this year to 110,000 customers.
The 401(k) market is a different story than IRAs and taxable
brokerage accounts.
Workplace plans have shifted dramatically toward automated account
management in recent years. But most of the action has been in
target-date funds (TDFs), which are designed to adjust an investor's
risk as retirement age approaches, through what is called a glide
path. The farther out the fund's end date, the higher the stock
allocation.
TDFs are helping 401(k) investors obtain better outcomes -
asset-weighted average investor returns in TDFs are 1.1 percentage
points higher than the funds’ average total returns, according to a
Morningstar study published earlier this year.
But a TDF is a one-size-fits all solution, and there is potential to
do more. That is where managed account services like the one
Betterment envisions enter the picture.
Managed account providers offer individually tailored help with
retirement planning. Typically, they eschew more expensive actively
managed funds, using very low-cost passive vehicles such as index
funds or exchange-traded funds (ETFs) - and then add on a fee for
the advice.
They can answer questions that go beyond asset allocation -
everything from Social Security claiming strategies to advice about
drawing down funds. Managed account advisers can even do some
hand-holding when markets take a nosedive.
Managed account services have not seen much traction in the market
yet. Eighty-six percent of plan sponsors pick TDFs as their default
option for participants who do not make investment elections on
their own, according to a survey by Towers Watson; managed account
services make up just 3 percent of default plan sponsor choices.
Betterment is facing an uphill climb, says Mike Alfred, chief
executive officer of Brightscope, which tracks and analyzes 401(k)
plans. “What they are pitching is an Apple experience for financial
services. But they will find out quickly it’s a tough market to
disrupt.”
COSTS
Expense has been the big barrier. Towers Watson reports that managed
account fees for large 401(k) plans often start around 50 basis
points, and they run higher for smaller plans.
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Those fees come on top of what is charged for underlying funds.
Betterment is entering a market dominated by several
well-established players. The market leader is Financial Engines,
with $102 billion in assets under management, according to Cerulli
Associates. Morningstar ranks second ($36 billion), followed by
GuidedChoice ($10 billion) and Fidelity Investments ($10 billion).
Some of these offer one-on-one personal help as well as
technology-guided assistance.
Betterment is betting on its reputation for industry-leading
technology, and it claims that it will get costs down. It also plans
to focus on small plans, where costs tend to run higher and may be
more ripe for innovation.
All-in costs (managed account services and fund costs) from
Betterment will range from 20 basis points for large plans to 70 for
small businesses. For that, investors will receive investment
management for their 401(k)s and any IRAs or taxable brokerage
accounts, plus recommendations on asset location - that is, how to
invest in each account type to take best advantage of their
taxability.
“These are things most wealthy investors have - but everyone should
have it, because it has a significant impact on returns,” said Jon
Stein, Betterment’s chief executive officer.
Stein thinks TDFs have benefited investors, but that managed
accounts can do much more. “We’ll do the glide path but personalize
it for you - so you’re not in a bucket with 10 million other people.
It will be exactly optimized for your retirement goals.”
Another key difference: Betterment will be offering plan sponsors an
all-or-nothing proposition. Unlike its competitors, which offer
managed account services as an option inside plans, companies that
sign up for Betterment's service will automatically enroll all of
their employees. That means investors will be paying the
individual's fees for the service whether they need it or not.
Most industry experts acknowledge that sophisticated guidance
options are most valuable for workers getting close to retirement
age; for younger workers just getting started saving, the best
solution is to just sock away as much money as possible in the
lowest-cost passive investment offered in the plan.
(The writer is a Reuters columnist. The opinions expressed are his
own.)
(Editing by Beth Pinsker and Matthew Lewis)
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