Evaluating 401(k) Plans? Look for Value and Transparent Pricing
Traditionally, 401(k) fee structures have been complex and it’s nearly impossible to determine costs. Pricing for a Betterment 401(k) is clear and transparent.
When assessing 401(k) plans, price comparisons are confusing and hardly ever apples to apples.
Be on the lookout for all the fees and product features that may or may not be included.
Participants (employees) in Betterment's 401(k) receive investment advice from an ERISA 3(38) fiduciary investment manager, while plan sponsors (employers) receive clear product offerings and prices.
When assessing 401(k) plans, some providers may lose you in the fine print. Betterment’s 401(k) offers valuable plan features for both employers and employees, at a clear price.
It’s nearly impossible for employers to determine exactly what they’re getting when evaluating 401(k) plan products and services.
That’s why each year 75% of employers (or plan sponsors) conduct a review of their 401(k) services to ensure that they are meeting their fiduciary obligations, which include offering reasonably priced investment options to their employees, or plan participants.
If employers wish to compare an existing plan with another, they’ll submit a Request For Proposal (RFP) to other potential plan providers.
Once they receive and attempt to review RFPs, however, is when the process becomes difficult to draw pure price and product comparisons.
Deciphering the best value among plans and providers is, needless to say, a complex task. So how can employers properly evaluate a 401(k) provider’s value?
Lost in the Fine Print
The 401(k) industry continues to struggle with communicating the value of its products and services, as evidenced by RFPs that only compare cost without demonstrating value.
This is due to the myriad of products and services comprising the retirement plan landscape.
Employers cannot escape confusing pricing tables based on a number of criteria, including upfront costs, number of monthly plan participants, and total amounts invested.
These pricing tables are usually accompanied by a long list of additional services and costs, often involving multiple vendors, such as a recordkeeper, third-party administrator (TPA), custodian, consultant, and/or advisor. It’s often hard to compile these into a bottom-line, all-in cost.
Nor do employers have a clear idea of the potential conflicts of interest and revenue-sharing arrangements hidden within the pricing (e.g., a recordkeeper recommending a certain fund line-up because they reap rewards for doing so).
Employers are hard-pressed to find publicly available pricing for 401(k) services. Take, for example, Charles Schwab’s website, which states that “fees vary and are based on business needs and solutions”; Fidelity’s website states that fees “vary by plan”; and Vanguard’s website touts that its fund expense ratio is 82% less than the industry average.
Yet none of these websites specify the total cost of their respective 401(k) plans.
This reveals a troubling fact about traditional 401(k) players—a lack of pricing transparency limits an employer’s ability to understand how the products differ and whether the fees are appropriate.
Assessing a 401(k) vendor then becomes challenging, particularly for businesses without the resources to fully vet pricing and features of such plans.
As a result, plan comparisons are usually apples to oranges, and decisions are based on other factors such as ease of administration (e.g., payroll integration) or relationships.
Betterment for Business: A Better 401(k) Solution
Betterment, the largest independent robo-advisor, recently launched Betterment for Business, the only turnkey 401(k) service that includes personalized management for all 401(k) plan participants.
Just like its retail predecessor, Betterment’s 401(k) has a clear and transparent pricing model. When compared to traditional advisory solutions, robo-advised 401(k) plans are also generally less costly.
Traditionally, the cost of administrative services was hidden in different share classes of mutual fund expenses.
This is not the case with exchange-traded funds (ETFs), where revenue-sharing is rare, and in which Betterment invests.
One key advantage of being an independent advisor is that Betterment’s investment selection process is designed solely to advance investors’ best interests and is not tainted by financial incentives from other investment firms.
This model of investment selection is built on transparency and independence. In addition, specialty services (discussed in detail below), such as goal-based investing, synced outside accounts, and a proprietary retirement planning tool known as RetireGuide, combine for a holistic approach to investing.
When the Department of Labor fully implements its fiduciary rule governing conflicts of interest, the bar for 401(k) plan transparency will be lifted to new heights and drive purchasing decisions like never before, according to Al Otto, a senior independent investment manager and advisor with Shepherd Kaplan, LLC.
As an ERISA 3(38) fiduciary, Betterment is legally responsible for managing a plan’s assets, a role that reduces plan sponsors’ exposure to claims that they breached their own fiduciary duties. As such, Betterment is poised for continued success in a regulatory environment that will likely hold plan fiduciaries to a higher standard.
Behind the Machinery
Betterment’s full suite of 401(k) features are considerably human for a company built on robo-advised, automated investment advice.
Perhaps even more noteworthy is 24/7 personalized investment advice for plan participants.
Unlike many 401(k) plans that put the onus on individuals to opt-in for advice (which they often don’t even realize is available to them, thus don’t sign up), Betterment’s advice is active from the moment employees log in.
Betterment’s technology analyzes a customer’s unique financial data when making investment advice. Not surprisingly, the power of robo-advised algorithms transcends human capacity for portfolio analysis.
While critics may argue that algorithms cannot replicate the wisdom of experienced financial planners or offer hand-holding through emotional periods of market volatility, Betterment distills from the collective wisdom of experienced CFPs, CFAs, and other experts when writing algorithms and designing its website.
The Best Value for the Cost
The initial task for 401(k) plan sponsors is to accurately compare costs.
Betterment for Business’s pricing is clear and concise, whereas some of the industry’s leading players bury services and costs details in the fine print.
There are also no hidden costs, nor does Betterment receive additional revenues from revenue sharing agreements from the non-proprietary, low-cost ETFs in which it invests.
Once proper cost comparisons are made, attention can be turned to uncovering the value of products and services being offered.
Employees Get Personalized Management, Employers Get an Affordable 401(k) Solution
Betterment’s 401(k) offering, Betterment for Business, made its mark with groundbreaking technology, an online service, and a mobile app that 401(k) plan sponsors and participants alike have found easy to use.
Mindful of the growing need for affordable investment advice to boost retirement readiness, Betterment’s 401(k) solution is the only provider to include personalized retirement advice to all participants without additional charges.
RetireGuide, Betterment’s retirement planning tool, helps to tell people how much they’ll need to save for retirement based on current as well as future income, taxes, and even retirement location.
When customers sync their outside investments, Betterment shows customers which providers are charging higher fees. Customers can also see opportunities to invest idle cash, and receive personalized retirement advice that tells them how much they’ll need to retire comfortably,
Betterment manages to be competitive in price due to its advanced technological platform. Robo-advised investing has become increasingly meaningful to various generations of workers and their dependents who are growing more accustomed to using technology for the most important financial decisions on a daily basis.
The larger point is that it’s important to value bundled core product and service offerings such as Betterment’s when assessing the overall prices from plan sponsors.