For decades, many employers have struggled to provide an inexpensive yet easy way for employees to optimally save and invest in a 401(k). For small- to medium-sized businesses, advice for all participants usually hasn’t been available as an an affordable option.
While plan providers offer seemingly endless fund options, most offer little guidance to employees on how much to save, which funds they should select, and how to allocate their money across those funds.
If advice is provided, it is typically through another vendor and at an added cost as high as 0.7%.
Many 401(k) providers also offer a selection of funds that they’ve been paid by fund providers to recommend. A recent study from the Center for Retirement Research (CRC) found that 76% of plans have trustees that are affiliated with mutual fund companies.
This creates a conflict of interest; the parties who help choose the funds offered within a 401(k) are also incentivized to recommend certain funds, thus they may not choose funds that are best for plan participants.
The Betterment 401(k) invests participants in a portfolio of completely independent funds. Our compensation is not impacted in any way by the funds that we select for participants. As a result, employees get investment selection that’s truly in their best interest, and employers aren’t at the mercy of conflicted trustees whose fees are subsidized by fund providers. We’ve designed the Betterment 401(k) to change this.
Our included advice sets us apart from traditional 401(k) providers. Through our affiliated registered investment advisor, Betterment LLC, we provide personalized, transparent investor guidance at no extra cost, with no hidden fees or conflicts of interest to the funds selected.
Personalized, Affordable Advice—for Everyone
At Betterment, we believe that everyone should have access to personalized retirement advice at an affordable cost.
Getting good advice can help improve participants’ savings rates and take-home returns. According to a Financial Engines study, a whopping 60.5% of 401(k) participants who received no online advice had inappropriate risk levels. Of those, the majority (two-thirds) of investors took on too much risk in their target-date retirement funds or managed accounts, while the remaining one-third took on less than the appropriate level of risk.
This means that they could have had more appropriate investment returns and more money in retirement, depending on their target retirement dates and investment goals.
Betterment for Business offers a revolutionary 401(k) solution that is the first and only 401(k) to include personalized retirement advice to all participants without additional charges1.
Our Qualified Default Investment Alternative (QDIA), the default portfolio for participant accounts, is an individually managed account based on a participant’s age and estimated retirement date. By providing additional personal information such as household income, and already existing retirement savings balances, participants receive more tailored recommendations, including advice on how much they should be saving.
Betterment then allocates the participant’s 401(k) contribution across up to 12 global asset classes, managing risk automatically and rebalancing the portfolio regularly to help keep the goal on track.
The Current Advice Landscape
Traditionally, 401(k) plan providers may offer funds that allocate assets, such as balanced funds and target-date funds, as investment options. But often, neither is sufficiently personalized, and therefore not ideal for most participants.
Balanced funds are not ideal because their static allocation advice does not adjust with time. Often, balanced funds result in an equity allocation that is too low for younger participants, and too high for older participants.
Target-date funds improve on balanced funds because they adjust allocations based on investment horizon, giving more age-appropriate asset allocations that adapt to the time horizon.
While this attempts to help participants take on the right level of risk, not all target-date funds are created equal, and they’re not personalized for participants’ specific goals. Various target-date funds from different providers can have wildly different allocations and glide paths for the same target year.
Additionally, the typical target-date fund is offered according to the 5-year increment in which participants wish to retire. For example, if participants want to retire in 2043, they’d have to choose from either a window of 2040 or 2045, which means their portfolio is crudely approximating an accurate level of risk. This insufficiently granular solution doesn’t take into account personal financial circumstances, or specific needs—both considered crucial elements when thinking about retirement planning.
Many target-date funds also tend to charge high fees because they are a “fund of funds” (i.e., one fund consisting of many underlying mutual funds), and there may be additional fees for creating the combined target-date fund.
According to a 2014 Morningstar report, the average target-date fund has an expense ratio of 0.78%, which is more than what Betterment for Business charges for its entire 401(k) platform, including recordkeeping, administrative services, and personalized advice.
In addition, target-date fund participants also tend to have lower contribution rates and balances than those of managed accounts or accounts that receive advice.
Balanced funds and target-date funds offer diversified asset allocation but don’t offer guidance about when participants can actually retire based on their savings, nor can they take into account any retirement savings a participant might already have outside the plan.
Betterment offers holistic advice, optimizing for when participants plan to retire, how much to save, and in which accounts. Upon retirement, Betterment’s Retirement Income service will help to ensure that plan participants understand the amounts they can safely withdraw to make their nest eggs last.
Research conducted by Empower Retirement suggests that participants using managed accounts—such as the ones used in the Betterment for Business 401(k)—see higher long-term portfolio growth than unadvised participants.
The study found that out of more than 315,000 401(k) participants from 2010 to 2015, those with managed accounts enjoyed an extra average annualized return of almost 2%. Over 40 years of 401(k) contributions, this return difference could result in nearly 70% more wealth in retirement. If you max out your 401(k) over all those years, you could be missing out on more than $3 million.
The Cost of Advice
We know advice is valuable, but how much does it cost?
Because traditional 401(k) service providers are also fund managers, plan sponsors or participants typically must pay another vendor for advice, at an additional cost. The advice fees are then charged on top of fund and administration fees.
Advice providers often only serve participants in the largest 401(k) plans and advice is typically provided only if participants affirmatively opt in. Below is an illustrative fee comparison of how the costs can add up:
Fee Comparison for Advice, Funds, and Administration
|Administration and Underlying Fund Costs||1.03%4||1.03%|
* This is Betterment’s maximum fee. See pricing.
Because Betterment isn’t a fund manager, we are able to choose the best funds available objectively and advise on the most appropriate asset allocation, without bias or conflict towards the funds.
And because advice is typically an add-on service at an additional expense, the total cost of having a managed 401(k) account with another plan provider (after adding in administration fees and underlying fund expense ratios) becomes significantly more expensive than an account managed by Betterment for Business.
Betterment’s advice is also available without the hassle of traditional “opt-in” procedures.
Employees often fail to utilize managed 401(k) plan investment advice because they may be unaware of what advice is even available to them—this is why traditional managed account participation rates are so low. For example, only 11% of the $954 billion in assets with Financial Engines are actually held in managed accounts, even though the other 89% is eligible for management, meaning that the opt-in rate for these services is fairly low.
Our Included Advice Is Smart
The Betterment for Business 401(k) includes personalized retirement advice to help participants save and invest for retirement.
The advice is available 24/7—so Betterment is ready to offer guidance anywhere, any time. If employees want to speak to someone, they can rely on our customer service team seven days a week to answer questions about how to get the most out of our service.
Betterment’s retirement advice is offered through RetireGuide, which is designed to not only recommend how much employees need to save given their retirement goals and unique situations, but also optimizes the use of their tax-advantaged accounts.
RetireGuide also advises 401(k) participants on how much they’ll need for each year of retirement, based on retirement date, location, and current savings goals—all of which is customizable.
RetireGuide Projections and Assumptions
What truly sets Betterment apart is our powerful savings advice. When participants sync external accounts with us, we consider those assets when evaluating retirement goals, including needs and income.
RetireGuide even factors in sources of external retirement income, such as Social Security income.
This level of personalized investment advice is what makes the Betterment for Business 401(k) smarter than any traditional plan available. Betterment for Business is changing the 401(k) because we believe everyone deserves to be truly ready for retirement.
1Based on Betterment’s survey of the current 401(k) provider landscape, as of January 19, 2016.
401(k) plan administration services provided by Betterment for Business LLC. Investment advice to plans and plan participants provided by Betterment LLC, an SEC registered investment adviser. Brokerage services provided to clients of Betterment LLC by Betterment Securities, an SEC registered broker-dealer and member FINRA/SIPC. Betterment LLC and Betterment Securities are affiliates of Betterment for Business LLC.
2Financial Engines charges participants approximately 0.20%-0.60% of their assets. A typical plan participant receiving advice from Financial Engines with a balance of under $100,000 could expect to pay 0.45%.
3Morningstar charges participants who receive advice approximately 0.35%-0.45% of their assets.
4The average cost of a 401(k) plan with approximately 1,000 participants / $50,000,000 assets is 1.03%.