Funds And Investments

Crypto in 401(k) Plans: The Department of Labor’s Guidance The US Department of Labor released fresh guidance on cryptocurrency investments for fiduciaries of retirement plans. This article describes the DOL’s guidance and its implications for retirement plans. The US Department of Labor (DOL) issued on March 10th what can be considered a warning to retirement plan fiduciaries that already or will in the future provide cryptocurrency options for plan participants. In the wake of President Biden signing an executive order that directs the federal government to develop plans for regulating cryptocurrencies (and digital assets), the DOL published Compliance Assistance Release No. 2022-01, a note that details its perspective on crypto investments and hints that the department’s Employee Benefits Security Administration will conduct investigations of plans that currently offer crypto and related investment options. This article will describe the DOL’s guidance and its implications for retirement plans. What does the DOL note say? The release issued by the DOL primarily serves as a heads up of some of the concerning aspects of crypto investing that should be very carefully considered by plan fiduciaries in order to avoid a breach of their duty to “act solely in the financial interests of plan participants and adhere to an exacting standard of professional care.” The release does not explicitly forbid crypto and related investment options within 401(k)s but instead lists risks associated with such investments. It also conveys that fiduciaries must be able to answer how they “square” providing crypto, if offered, with their fiduciary duties in the context of these risks. The specific risks the DOL identifies are shown below. Risk Description Speculative and Volatile Investments The DOL warns that many crypto investments are subject to extreme volatility, exhibiting sharp swings higher and lower, with the potential that a large drawdown could significantly impair a plan participant’s retirement savings. The Challenge for Plan Participants to Make Informed Investment Decisions The DOL notes that difficulties exist for unsophisticated investors to “separate the facts from the hype” and make informed decisions when it comes to crypto, especially when compared with more traditional investments Custodial and Recordkeeping Concerns The vulnerabilities of much of the current crypto investment infrastructure to hacks and theft is a specific concern to the DOL given the severity of a plan participant losing the entirety of their crypto position Valuation Concerns The difficulty of determining a fundamental value of crypto investments compared to traditional asset classes, along with differences in accounting treatment and reporting among crypto market intermediaries, make up additional concerns to the DOL Evolving Regulatory Environment According to the DOL, “fiduciaries who are considering whether to include a cryptocurrency investment option will have to include in their analysis how regulatory requirements may apply to issuance, investments, trading, or other activities and how those regulatory requirements might affect investments by participants in 401(k) plans” What does this mean for Betterment at Work? 401(k) plans accessed through the Betterment at Work platform currently do not offer crypto investment options. As a 3(38) investment fiduciary, Betterment reviews investments on an ongoing basis to ensure we’ve performed our due diligence in selecting investments suitable for participants' desired investing objectives. As crypto markets and the regulatory environment around retirement plans evolve, Betterment will re-evaluate the suitability of crypto investments within retirement accounts. We will continue to monitor ongoing developments and keep you informed, similar to our efforts to track the DOL’s guidance for Environmental, Social, and Governance-related investing within retirement plans. The above material and content should not be considered to be a recommendation. Investing in digital assets is highly speculative and volatile, and cryptocurrency is only suitable for investors who are willing to bear the risk of loss and experience sharp drawdowns. Purchases or holdings of cryptocurrency are not FDIC or SIPC insured.

ESG Investments in 401(k) Plans: Part 2 The new DOL proposal provides clarity with ESG investing.In the beginning of 2021, we discussed the US Department of Labor (DOL)’s “final rule” entitled “Financial Factors in Selecting Plan Investments,” pertaining to ESG (environmental, social, governance) investments within a 401(k) plan. In March, the DOL under the Biden administration stated that they were not going to enforce the previous administration’s rule until they had completed their own review. Most recently, the Biden DOL released its own proposal, reworking parts of the rule to be more favorable to the inclusion of ESG investments within 401(k)s and clarifying areas that had a chilling effect on fiduciaries performing their responsibilities. So what’s changed?   2020 Rule New Proposal Evaluating investments Investment choices must be based on “pecuniary” factors, which include time horizon, diversification, risk, and return. Clarifies that ESG factors are permissible and are financially material in the consideration of investments. Qualified default investment alternative (QDIA) Cannot select investment based on one or more non-pecuniary factors. ESG factors are permissible, allowing the possibility of wider adoption of ESG funds and portfolios. Tie-breaker test (when deciding between investments) Non-financial factors such as ESG are permissible. However, they must have detailed documentation. Permitted to select investments based on “collateral benefits” such as ESG. Where collateral benefits form the basis for investment choice, disclosure of collateral benefits required. Detailed tie-breaker documentation not required. Proxy voting Fiduciaries are not required to vote every proxy or exercise every shareholder right. Revised language stresses the importance of proxy voting in line with fiduciary obligations. Special monitoring for proxy voting when outsourcing responsibilities. Proxy voting activities must be recorded. Additional special monitoring is not required. Removal of record keeping of proxy activities. Safe harbors: a fiduciary can choose not to vote proxy if (a) the proposal is related to business activities or investment value (b) percentage ownership or the proposal being voted on is not significant enough to materially impact. Removal of safe harbors. Voting to further political or social causes “that have no connection to enhancing the economic value of the plan's investment” through proxy voting or shareholder activism is a violation. Opens the door to ESG factors when voting proxies as under the proposed rule that they are economically material. Why is this important? Under the new proposal, the DOL clarifies that “climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”  Under the previous rule, many ESG factors would not count as a “pecuniary” factor. However, in actuality ESG factors have a high likelihood of impacting financial performance in the long run. For example, climate change can shift environmental conditions, force companies to transition and adapt to these shifts, lead to disruptions in business cycles and new innovations, and ultimately be a material financial risk over time when a company declines from failing to adapt. For retirement plans, the DOL’s revised proposal acknowledges that ESG risks could be  important to consider when reviewing investments for strategic portfolio construction. Driving impact through ESG investing and proxy voting works. We’ve seen this concept in action with Engine No.1 winning three ExxonMobil board seats in a six month long proxy battle. The change in having three new board members that are conscious of climate change and favor transitioning away from fossil fuels will benefit the company in the long term as renewable energy grows in prominence. After its successful proxy battle with Exxon, Engine No. 1 reported cordial discussions with representatives of Chevron Corp. regarding the company’s emissions reduction strategy, and also has reportedly built a stake in General Motors and expressed support for GM’s management actions relating to increased electric vehicle production and GM’s long-term strategy. Ernst & Young also published data showing an increasing trend of how more Fortune 100 companies are incorporating ESG initiatives into proxy statements. For example, 91% disclosed they are incorporating workplace diversity into their initiatives in 2021 versus 61% in 2020.  Demand for ESG products will continue We believe demand for ESG-focused investing will continue to grow, and it is important that regulations are clarified to accommodate this trend. Bloomberg projects that global assets in ESG will exceed $50 trillion by 2025, which is significant as it will represent a third of projected global assets under management. In the US, $17 trillion is invested in ESG assets. Trends within ESG ETFs tell the same story where fund flows this year have increased by more than 1000% compared to flows seen just three years ago. How Betterment incorporates ESG investing in 401(k) plans At Betterment, we believe investing through an ESG lens matters, especially within 401(k) plans which tend to have a longer time horizon. We’ve found many ways to thoughtfully weave ESG investing into our portfolio strategies. Betterment has a 10+ years track record of constructing globally diversified portfolios, along with a history of implementing ESG investment strategies in 401(k)s using our Socially Responsible Investing (SRI) portfolios. The SRI portfolios come in three different flavors: Broad Impact, Social Impact, and Climate Impact. Each of these portfolios allow our clients to choose how they want to invest to best align their portfolio with their values.  Perceptions of higher fees in the ESG investment space has been a misconception that  has historically posed an obstacle to the adoption of pro-ESG regulation. Expense ratios of ESG ETFs have declined to 0.20%, which is low compared to the 0.53% average expense ratio of all ETFs in the US. Within Betterment’s SRI portfolios, and depending on the investor’s overall portfolio allocation to stocks relative to bonds, the asset weighted expense ratios of the Broad Impact, Social, and Climate portfolios range from 0.12-0.18%, 0.13-0.20%, 0.13-0.20% respectively. Another misconception is that in order to adopt ESG investing, you have to sacrifice performance goals. As a 3(38) investment fiduciary, Betterment reviews fund selection on an ongoing basis to ensure we’ve performed our due diligence in selecting investments suitable for participants' desired investing objectives. To determine if there were in fact any financial tradeoffs associated with an SRI portfolio strategy relative to the Betterment Core, we examined evidence based on both historical and forward-looking returns. When adjusting for the stock allocation level and Betterment fees, we found that: There were no material performance differences The portfolios were highly correlated overall Over certain time horizons the SRI portfolios actually outperformed the Betterment Core portfolio In the table below, we compare the equity ESG ETFs that we invest in our Broad Impact portfolio and the broad market capitalization weighted equity ETFs that we invest in our Core portfolio strategy. ETF Ticker ETF Fund Name Exposure 3 months 6 months Year to Date 1 Year 3 Years* Since Common Inception Period* (12/23/2016) ESGU iShares ESG Aware MSCI USA ETF US ESG 0.28% 8.99% 15.35% 30.60% 17.19% 17.37% VTI Vanguard Total Stock Market ETF US -0.06% 8.21% 15.18% 32.09% 16.00% 16.50% ESGD iShares ESG Aware MSCI EAFE ETF International Developed ESG -0.79% 4.55% 8.15% 26.05% 8.12% 10.03% VEA Vanguard FTSE Developed Markets ETF International Developed -1.52% 4.08% 8.26% 26.60% 8.19% 10.08% ESGE iShares ESG Aware MSCI EM ETF Emerging Markets ESG -7.98% -2.78% -0.79% 19.04% 9.65% 11.87% VWO Vanguard FTSE Emerging Markets ETF Emerging Markets -6.94% -2.14% 1.37% 18.47% 9.63% 10.58% Source: Bloomberg, Betterment as of 9/30/2021. Market performance information is based on the returns of ETFs tracked by Betterment, using returns data from Bloomberg, for the time periods ending in 9/30/2021. Fund-level fees are included in each ETF return and dividends are assumed to be reinvested in the fund from which the dividend was distributed. Performance is provided for illustrative purposes to compare broad market ETFs to the ESG ETFs that are used in some of the Betterment Socially Responsible Investing (SRI) portfolios. The ETF performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used in the Betterment SRI portfolios will differ from the performance of the returns reflected here.*Periods longer than 1 year are annualized. Our forward-looking analysis does not provide any basis for concluding that, over the long term, there will be a meaningful difference in performance between our SRI and Betterment Core portfolios. You can read about our full methodology and performance testing in our SRI Portfolios white paper. Another example of how we’ve incorporated ESG impact investing is through the addition of the Engine No. 1 Transform 500 ETF (VOTE) into all three of our SRI portfolio strategies last quarter. With VOTE ETF, you can still maintain exposure to the 500 largest companies within the US at an inexpensive expense ratio of 0.05%. That may seem counterintuitive since it mirrors owning the S&P 500 Index, however the magic happens behind the scenes as the fund manager uses share ownership to vote proxies in favor of ESG initiatives. This is a new form of shareholder activism and another way performance goals, exposure, and fees do not have to be sacrificed to make a difference.  What’s next? We are hopeful that ease of interpretation with this rule may allow wider adoption of ESG products as investment options and may lead to greater incorporation of ESG factors in the decision making process as we do believe they are material. This has been a focus of Betterment’s as we seek to remain ahead of the trend with our product solutions.  The public comment period for the proposed rule begins Thursday, Oct. 14 and will close on Dec. 13. We will continue to monitor ongoing developments and keep you informed. Note: Higher bond allocations in your portfolio decrease the percentage attributable to socially responsible ETFs.

Betterment’s 401(k) Investment Approach Helping employees make better decisions and providing choice to those who want it. Dan Egan, Betterment’s VP of Behavioral Finance and Investing, explains why Betterment’s investment approach is effective for all 401(k) participants  Investment Approach Q&A Betterment’s 401(k) investment approach differs from that of traditional providers, but can you give us a little history about the 401(k) environment pre-Betterment? If I go back to the first job where I had a 401k, probably about 20 years ago, there was a lineup of funds, and it was up to me as a 401(k) participant  to figure out which funds to pick and in what ratios, how much to save and so on. The research coming from that period showed that people often ended up in an analysis paralysis state, where there was so much choice and so many things to consider. It was very difficult for people to know whether they were investing at the appropriate risk level, how much they were paying and so on. Many people were so overloaded that they decided to forego saving for retirement than risk making a “bad” decision. But as the industry matured, and everyone realized that more choice does not necessarily lead to better decision-making, the Pension Protection Act (PPA) was passed in 2006. The idea here was not to eliminate choice, but to encourage good defaults that would encourage 401k plan participation. How exactly did the PPA encourage more 401(k) participation? Well for one thing, it allowed for safe harbor investments in the form of QDIAs, or qualified default investment alternatives. The most popular QDIAs were target date funds, which are linked to an individual’s age so if you're 40, it’s assumed that you will be investing for the next 25 years and retiring at 65. Target dates have a glidepath so that the stock allocation becomes more conservative over time, so the employee doesn't have to do anything like managing a portfolio or rebalancing. After the PPA, it became much more common for employees to be auto-enrolled using a target date fund or something like it, and all of sudden, they no longer had to make choices. People were no longer worried about picking and choosing from a whole bunch of individual funds or even individual stocks. And the plan designs promoted by the PPA really worked: plan participation rates that had been languishing saw rates increase to 80 or 90% after implementing auto-enrollment. By the time Betterment started its 401(k) platform, the changes brought about by the PPA were already well established. So talk a little bit now about how Betterment's 401k investment approach differs from that of traditional 401(k) providers. Betterment takes and builds upon a lot of the ideas in a target date fund and goes further. Number one, we are not a fund manufacturer. We are independent from fund companies. So part of our job is to be a real investment advisor and financial advisor, and do the due diligence on all of the funds that are available out there. If you're picking from amongst eight large-cap US stock funds, there's not a lot of variation in what their returns are going to look like and you can generally predict performance versus a benchmark knowing the fund costs. So part of our job is to actually do the work on the behalf of participants, to narrow down the field of funds towards just the ones that stand out within a given asset class and that are cost-effective. We then ask more specific questions including not just how old someone is, but also more personalized questions like when someone plans on retiring. Some people want to retire as early as possible. That might be 55, 57, 62, which is when you can start taking social security. Other people want to keep working as late as possible, which is 70 or 72. Those are extremely different retirement plans that should have different portfolios based upon those hugely different time horizons. So unlike a target date fund, which says, this is your age and you're done, Betterment is going to ask about your age, but also things like, when do you want to retire? Putting together a holistic retirement plan, it might involve your spouse or significant others, retirement assets, and even doing tax optimization across the account types that you have available to you. And how does that help the employee? A lot of it is about making it easy for consumers to make better decisions, not imposing a bunch of choices on them. You have to remember, the vast majority of people are not commonly and frequently thinking about stocks and investing. They don't want to have to look up prospectuses and put together a risk managed portfolio. So Betterment does the work for them to make it very easy for them to understand how to get to where they want to be. I want to be clear that that's not necessarily about removing choice, it's about making it easy to get to a solution quickly. It’s also about minimizing the number of unnecessary choices for most people while maintaining choice for people who want it. At Betterment, 401(k) investors can still modify your risk level. You can say, "Yeah, maybe it makes sense for me to be at 90% stocks, but I'm not comfortable with it. I want to be at 30% stocks." Or they can modify their allocations using our flexible portfolio strategy, so that they can come in and say, "Actually I don't like international as much." So it's not about removing choice. And we let them see the consequences of that in terms of risk and return. So employees in Betterment 401(k)s have choice, but how do you respond to people who might already have a 401k or are already invested in funds outside of their 401k, and have a favorite fund that they feel is an absolute must have? I’m not necessarily against people who have put time and effort into researching something and wanting to invest in it. But I think it is focusing on the wrong thing. When you look at long-run research statistics on funds, the predictability of fund success within a category is very low. A fund that outperformed last quarter is very unlikely to continue to outperform this quarter. So I would say that the fund is very rarely the most important aspect of the 401(k) plan or decision. And I’d guess most participants don't have a favorite fund. Again, going back to research we've looked at across a wide array of companies, most people are looking to minimize how much burden is imposed upon them in making decisions about what they should do for their retirement. There is generally a very small minority who have very strong views about what the right investments are. And that trade-off shows up in that we will generally look at low-cost funds, well-diversified funds. We do offer a range of choice in terms of portfolio strategy: do you want a factor-tilted portfolio or a socially-responsible portfolio or an income portfolio? Without necessarily saying that you're responsible for doing the fund due diligence yourself. It is true that we offer a trade-off: we're not the wild west where you can go out and get anything you want. And that is because that level of discretion is just very, very rarely used by plan participants. There's a lot of potential to do the wrong thing when somebody has a completely open access plan. Not to mention, all plan fiduciaries have an obligation to act in the best interests of their plan participants as a whole. So they have to evaluate what makes the most sense for the majority of plan participants, not a small, vocal minority. Somewhat related, what is your response to people who argue that Betterment’s all-ETF fund line-up is too limited? A 401(k) plan made up exclusively of ETFs is no less limiting than a 401(k) plan made up exclusively of mutual funds. Because mutual funds have been around much longer, it’s true that their universe is larger, but I think anyone would be hard pressed to argue that 8,000+ ETFs is not enough to choose from. ETFs represent an advancement over mutual funds because they are cost-effective, highly flexible, and technologically sophisticated. They are critical to Betterment’s investment approach and a better alternative for 401(k) plans, in large part because mutual funds have complex fee structures and are typically more expensive than ETFs which have transparent and low costs. So why do so many plans still use mutual funds? We believe it’s not despite these issues but because of them, since fees embedded in mutual fund expense ratios are often used to offset the costs of 401(k) vendors servicing the plan. In addition, many legacy recordkeeping systems do not have the technology to handle ETF intraday trading and must restrict their clients to using funds that are only valued at the end of the day. Betterment’s 401(k) plan comes with a 0.25% investment advisory fee. What do employers and employees get for that? I think there's actually two levels to this. The first is “does this actually cost me more?” It’s definitely more transparent in its cost, but most 401k plans charge more via higher fund fees. The fund fees may even include embedded fees that go to pay for other plan services. In these more traditional models, the fees are hidden from you, the consumer. But trust me: everybody is getting paid. It's just a matter of whether or not you're aware how much and who you're paying. That also sets up the very important second aspect which is: what is this investment manager responsible for and what are they incentivized to do well? What does Betterment do for 25 basis points? Well, number one, that's how we make sure that we're independent from the fund companies; we don’t get paid by them. Every quarter, we go out and we look at all of the funds that are available in the market. We sort through them, independent of who provides them, looking at cost, liquidity, tax burdens etc. And if we find a better fund, because we take no money from fund companies, we're going to move to that better fund. So one thing that you're paying for is, in effect, not only ongoing due diligence and checking, but you're paying for independence, which means that you get the best raw materials inside of your portfolio. The other thing you get is that we want to earn that 25 basis points by serving clients better. So we want to invest in things like personalized retirement portfolios (available to every 401(k) participant) where we are actually able to give better retirement advice that takes into account you, your partner, all the various kinds of retirement accounts you have: Roth, IRA, taxable, trust, maybe even pensions or other income sources. Or asset location, for example, which works across tax-advantaged retirement accounts so that employees can keep more of their money and enjoy higher levels of spending in retirement. So what you get from paying somebody to do a good job, is you get them really incentivized to take care of their customers. Betterment takes care of its customers. We are motivated to do a good job and to retain all of our customers.

ESG Investments in 401(k) Plans: The DOL Final Rule Final Rule shifts focus to accommodate growing participant interest in ESG investing. As investors show increased interest in environmental, social and governance (ESG) investing, the government has taken notice. In June, 2020, the Department of Labor (DOL) issued a proposed rule focused on the use of ESG options within retirement plans (such as 401(k)s), citing concerns that investment options were being evaluated using non-financial factors. The DOL softened its stance in its Final Rule, “Financial Factors in Selecting Plan Investments,” released on October 30, 2020, by shifting its regulatory focus away from specifically ESG criteria to the use of broadly defined “pecuniary factors,” or financial considerations, and permitting additional flexibility to consider ESG factors in a financial analysis of investment options. So what exactly is the Final Rule and how do Betterment’s socially responsible investing (SRI) portfolio strategies comply with it? Back to Basics: 401(k) Fiduciary Responsibilities As an employer sponsoring your company’s 401(k) retirement plan, you take on important fiduciary responsibilities under ERISA (Employee Retirement Income Security Act of 1974), including a duty of loyalty and a duty of prudence: The duty of loyalty requires plan sponsors act in the best interests of their plan participants at all times. The duty of prudence requires plan sponsors to be knowledgeable about their plan’s investment options and, if they lack investment expertise, to hire and monitor a service provider like Betterment to manage their plan’s investments for them. While plan sponsors cannot fully transfer all of their fiduciary responsibilities to a service provider, Betterment helps with many of these obligations, serving as both a 3(16) administrative fiduciary and a 3(38) investment fiduciary for 401(k) plans. Betterment as a 3(16) administrative fiduciary handles certain day-to-day administrative responsibilities, such as recordkeeping and filing reports. Betterment as a 3(38) investment fiduciary assumes responsibility for selecting, managing and overseeing a plan’s investment options, relieving plan sponsors of their investment fiduciary responsibility. As a 3(38) investment manager, Betterment is directly responsible for ensuring that our investment options comply with the Final Rule. Having an understanding of the Final Rule and Betterment’s compliance with it will help plan sponsors to ensure that Betterment is choosing investments appropriately for their plans. Changes Resulting from the DOL Final Rule Long-standing DOL guidance, called the “investment duties regulation,” previously focused on how an investment fiduciary could satisfy the duty of prudence in selecting and managing investment options available to participants. The Final Rule makes several key changes to the investment duties regulation and goes into effect on January 12, 2021. “Pecuniary” Factors and the Tie-Breaker Test The Final Rule requires that plan fiduciaries evaluate investments based solely on pecuniary factors (financial criteria), which, consistent with past regulation, include time horizon, diversification, risk, and return. The Final Rule’s definition of pecuniary factors provides additional flexibility for fiduciaries to select an investment option (such as an ESG option) if it has a return and risk profile equivalent to or better than alternative options. Investment fiduciaries, like Betterment, can evaluate whether certain factors (such as brand, corporate reputation, or sustainability) would affect the risk return calculus of an investment, and thus constitute pecuniary or financial factors. The Final Rule also allows an investment fiduciary who is unable to make an investment decision on the basis of financial factors alone to include non-financial factors. To rely on this tie-breaker test, the investment fiduciary must document the decision in detail. Acting in Participants' Best Financial Interests The Final Rule sets forth that investment fiduciaries may not prioritize other objectives over the interest that participants and beneficiaries have in returns generated from their retirement investments (i.e. their future retirement income), such as sacrificing return or taking additional risk to promote non-pecuniary goals. In other words, the duty of loyalty requires fiduciaries to act in the best financial interests of participants. In addition, fiduciaries must also consider reasonably available alternatives, but not every possible alternative in the market. Application to Qualified Default Investment Alternatives (QDIAs) Lastly, the Final Rule prohibits an investment alternative from being used as a QDIA if it has investment objectives or strategies that consider one or more non-pecuniary factors. Consequently, plan fiduciaries should be careful when choosing a QDIA investment strategy to ensure that it does not identify non-financial performance metrics (such as ESG) as an investment goal or a principal investment strategy. Betterment’s Investment Options Betterment Core as QDIA As a 3(38) investment fiduciary to 401(k) plans, Betterment uses its core (Core) portfolio strategy as the QDIA. If plan participants do not select an investment strategy to be used for their 401(k) account, all of their contributions will be invested pursuant to the Core portfolio strategy. The Core portfolio strategy is a globally diversified portfolio of low-fee stock and bond Exchange Traded Funds (ETFs) that includes stock investments in developed and emerging markets and bond investments in governments, agencies and corporations around the world. It considers diversification, liquidity, and current and future return as primary performance metrics in line with the DOL’s guidance and takes into account an appropriate level of risk based on the participant’s age and expected retirement age.  Notably for purposes of the Final Rule, the Core portfolio strategy does not name ESG factors as investment goals and does not consider ESG factors in the selection of investment funds to include in the portfolio strategy. To learn more, the Betterment Core portfolio strategy white paper describes the Core portfolio’s construction and methodology. That being said, Betterment does provide a broad range of other investment strategies for participants who do not want to invest in the Core portfolio. Betterment evaluates and monitors all investment portfolio strategies available to participants and beneficiaries. Betterment SRI Portfolios Plan participants with a Betterment 401(k) account may elect, if they choose, to invest their contributions in one of Betterment’s Socially Responsible Investing (SRI) Portfolios, which were recently upgraded to include Broad Impact, Climate Impact and Social Impact portfolio strategies. Betterment’s SRI portfolio strategies aim to maintain the diversified, low-fee approach of Betterment’s Core portfolio while increasing investments in companies that meet SRI criteria. Betterment’s three SRI portfolios each have a different focus within the realm of Environmental, Social, and Governance (ESG) investing. Betterment’s Broad Impact portfolio offers increased exposure to companies that rank highly on all ESG criteria equally, while Betterment’s Climate and Social Impact portfolios focus on increasing exposure to companies with positive impact on a specific subset of ESG criteria. In constructing and testing our SRI Portfolios, we evaluated whether the portfolio or selected investment fund is in the best interests of our clients, including plan participants. To satisfy our duty of loyalty and duty of prudence, we consider here the pecuniary metrics of the SRI Portfolios relative to the Betterment Core portfolio, a reasonably available alternative. Betterment SRI Portfolios are Diversified and Low-Cost The Final Rule reiterates that plan fiduciaries must consider diversification and the reasonable expenses of administering the plan. At Betterment, diversification and low-cost are key tenets of our investment philosophy and were applied to the development of the SRI portfolios. We analyzed all liquid ETFs available which aligned with the SRI mandate of each SRI portfolio that could replace components of the Core portfolio strategy without disrupting the diversification or cost of the overall portfolio. You can read more about the ETFs that are included in each of the SRI portfolios in our SRI Portfolios white paper. While funds that meet ESG criteria are often more expensive, we sought to ensure that the SRI portfolios remained consistent with our low-fee mandate and are not meaningfully higher than those of the Betterment Core portfolio. Expense ratios vary depending on the specific asset mix. Compare our portfolio expense ratio ranges:   Betterment SRI Portfolios Are Performance Tested Stressing that plan fiduciaries must evaluate investments based on pecuniary factors alone, with the Final Rule the DOL sought to address concerns that a socially responsible investment could lead to lower returns in the long term compared to another similar portfolio. To determine if there were in fact any financial tradeoffs associated with an SRI portfolio strategy relative to the Betterment Core, we examined evidence based on both historical and forward-looking returns. When adjusting for the stock allocation level and Betterment fees, we found that: There were no material performance differences The portfolios were highly correlated overall Over certain time horizons the SRI portfolios actually outperformed the Betterment Core portfolio Our forward-looking analysis does not provide any basis for concluding that, over the long term, there will be a meaningful difference in performance between our SRI and Betterment Core portfolios. You can read about our full methodology and performance testing in our SRI Portfolios white paper. Our findings are consistent with broader testing of sustainable funds by third-party sources. A white paper by the Morgan Stanley Institute for Sustainable Investing summarized the results from a study that analyzed the performance of nearly 11,000 funds from 2004 to 2018 and compared traditional funds to sustainable funds. The primary takeaway of the study revealed that there was no trade-off in performance when comparing sustainable to traditional funds. Summary While the Final Rule does place some limitations on ESG investing within retirement plans, it is flexible enough to permit investment fiduciaries like Betterment to include ESG factors as part of its financial evaluation of an investment option or strategy. Betterment complies with the Final Rule by offering the Betterment Core portfolio strategy as its QDIA and by carefully evaluating the other available portfolio strategies to ensure they do not sacrifice return or take additional risk to promote non-pecuniary goals. Our extensive work to construct diversified low-cost SRI portfolios is in line with the DOL’s guidance, and our historical and forward-looking performance did not provide any basis to conclude that the Betterment SRI portfolios entail a tradeoff returns for sustainability. Because of this measured approach to portfolio construction and performance testing, we are able to offer plan participants the opportunity to invest in SRI portfolios that are in their economic best interest and align with their values.

How Betterment’s investment approach helps 401(k) investors Dan Egan, Betterment’s VP of Behavioral Finance and Investing, answers the most common investment questions asked from 401(k) plan sponsors. Questions and answers with Dan How should plan sponsors think about the investment funds within a 401(k)? People may be surprised to hear this, but aside from avoiding high-cost funds, the specific funds in a 401(k) are probably the least important part of a 401(k) plan. If you’re not saving, using the right account types, or looking at things holistically (for instance how you’re going to claim social security), then the returns won’t be very powerful.  The savings base those returns are built on needs to be adequately established. So how do you respond when someone asks “how do your funds compare to the market?” Betterment tries to match, not under- or out-perform the market. Generally, when we’re talking about the market for a given asset class we’re talking about an index, which is not something you can invest in directly. So we invest in funds that seek to track the market index, and we do it for as little cost as possible. Betterment likely won't be the worst or best performer because we don’t make concentrated gambles. We don’t take bets on specific companies, sectors or strategies. However, we do know that how much you pay for a fund - its expense ratio - is the best predictor of its future success. The less you pay, the better your outcome compared to peers. People may be surprised to hear that Betterment isn’t trying to beat the market. Can you explain why that is? First, the most important job of a financial advisor is helping people make the most of their money, especially in crafting a successful retirement plan. For 401(k) plans, it’s all about helping individuals achieve their retirement saving goals. Are they saving the right amount? Are they using the right accounts? Do they have a plan that aligns with how they’re actually going to spend money in retirement? We guide investors toward those levers over which they have control and that have a high degree of certainty. Second, the odds of anyone consistently beating the market is quite low. When you try to pick funds to beat the market, in any given period your fund may be very much above or below the market. Consider that even Warren Buffet has underperformed the market by up to 67% over a two-year period.  There’s very little predictability about which fund is going to be above market in the future. On the other hand, there’s actually very good predictability about who’s going to be below average—because of costs. Costs are just a deadweight headwind that you pay for no matter how well or poorly the fund does. So given the low expected benefit of trying to pick winning funds, and the higher downside of high-cost funds, Betterment focuses on keeping costs low. How does this “independence” manifest itself? We’re different from many advisors in that we don’t run our own funds, we don’t take a cut of anything, and we don’t take kick-backs. So we make decisions that are based purely on doing what’s best for our clients. There’s no undue influence on what is a very rigorous, systematic process. Every quarter we consider new funds that might be a better fit. There might be changes to the existing fund line-up, or we might switch funds between primary and secondary positions based on forward-looking fund performance. The fact that we don’t have our own funds means we are free to pick whichever ones are right for clients, regardless of who manages them. Our sole mission is to deliver the best performance in a highly predictable way. And we do that by focusing on low costs, high liquidity and tax efficiency. How does your approach protect investors in down markets? We diversify portfolios across stocks and bonds, both domestically and internationally, which offers some amount of downside protection. But there’s no short-term reallocation involved that would cause us, for example, to move to 0% cash one month and 100% stocks the next month. Our approach is to reduce risk through diversification. So when the global markets go down, our portfolios will go down with them. No one has a crystal ball to know what the markets are going to do (and if we did have one, we would keep it to ourselves!). What we do instead is help clients align their level of risk in their portfolio to their goals and time horizon. That’s where the idea of a glidepath comes in. If someone is getting close to retirement, they don’t have a lot of time to recoup losses from a market downturn, so they should be taking less risk (ie., have a lower percentage of stocks to bonds). On the other hand, someone who is 20 or 30 years from retirement should tolerate being in a portfolio with a high percentage of stocks because even when there’s a market downturn, they’ll probably still be ok at the end of their investment horizon. Can you tell us more about the advice and guidance Betterment provides? We provide advice and guidance within the application to every individual, encouraging them to use the right account type, aggregate external accounts, and have a holistic plan that considers other assets. We also give access to investors to techniques like tax coordination that high net worth advisors have been using for years. By using knowledge and information about the tax code and tax rates, we can help investors keep more of their after-tax spending money in retirement. Taking advantage of that strategy also means participants may not have to save as much (or alternatively can have a higher target retirement spending amount). What are some other tools that Betterment 401(k) participants have access to? Most people stick with the default portfolios. But our Flexible Portfolio Strategy was built primarily for 401(k) participants who wanted to have more control over how their portfolio was allocated. What’s interesting is that even when people change the weights of individual funds within a portfolio, we provide guardrails of sorts that tell them when they’ve become too concentrated or taken on a risk level that is quite different than what we would recommend. And we see that people who use these tools really pay attention to those guardrails. They have the comfort of having some control but also respect the guidance that we provide them. We know that the Betterment platform allows 401(k) to save for other goals besides retirement. How does that work? Our platform allows for multiple goals so that investors can think about different pots of money differently. If there’s only one pool of money, then the investor has to figure out a way to quantify the average risk or asset mix that would be appropriate across all goals. By allowing people to assign different pools of money to individual goals, all with different time horizons, investors actually behave better because they have a purpose in mind. For instance, having a safety net that is fully funded allows people to “check the box” on the conservative side of things, making them more comfortable to take more risk with their retirement savings. Why doesn’t Betterment use the risk tolerance questionnaires to determine how to allocate someone’s investments? Rather than classifying people into categories, we want to interact with them and engage them in a conversation. When setting an allocation, for instance, we display the expected returns over both the long-term and the short-term. Sure, the 500% cumulative return over 30 years looks great, but are you comfortable knowing that you might lose 30% in any given year? If not, you may need to dial back your risk level. We want to have clients wrestle with that a bit, take it in and make a better decision off the bat. We think it’s better to have an ongoing conversation so that investors are thinking ahead about, for instance, the impact of a market downturn. So when the inevitable happens, people realize it’s a normal part of the process and don’t get so rattled. That ongoing conversation is important, too, because people’s attitudes toward risk often change over time. What about plan sponsors who are putting off starting a plan or moving to Betterment because they are nervous about the market volatility? If they’re waiting for the market to stabilize, well, that’s just market timing of a different sort. Sure, in a perfect world it would be great never to have to be out of a market (as with conversion plans) but over a short period of time, the market can do any crazy thing. So I worry about people putting off a good long-term decision for something that is outside of their control and only relevant in the short-run. There’s very low predictability about what’s going to happen in the market, but there’s a high predictability that moving to Betterment would give your employees access to advice and tools that could help them have more money in retirement. I would caution plan sponsors to avoid putting off a good decision waiting for something that they can’t plan for and encourage them to make decisions for things they can control.

How to Pick Investments for Your 401(k) We believe there’s a better way when it comes to 401(k) investments. It starts with us providing a high level of investment fiduciary protection. You know how important it is to offer a 401(k) plan in today’s marketplace. Having a competitive retirement plan can help your organization attract and retain talent and be a key component to an overall financial wellness program. Your employees may be years away from retirement, but a 401(k) plan, and the educational resources that often come with it, can help them feel more confident about their futures; and especially if your organization offers a 401(k) match and/or profit-sharing contribution, balances in employee retirement accounts can really add up quickly. Whether you are starting up a 401(k) plan for the first time or your organization already has a 401(k) plan, it’s important to keep current with market trends. This is especially critical if your company has a high percentage of positions in competitive fields, where an attractive 401(k) plan can be a deciding factor for people (either prospective hires or current employees (who may be evaluating competing job offers).    Your 401(k) Decisions Some of those trends may revolve around plan design, including whether or not to offer a matching contribution, automatic enrollment, or whether to convert your plan to a safe harbor design that eliminates compliance testing. Each of these decisions will likely have a significant financial impact to your organization and therefore must be weighed carefully.  One of the most visible decisions you have to make is around investments. It’s not just that you might pick funds that your employees don’t like (although you might hear about that!); selecting and monitoring funds is one of the most important fiduciary responsibilities that you can have as a plan sponsor. And the consequences of not executing that responsibility can be serious and expensive.  In fact, in recent years there have been a significant number of lawsuits against plan sponsors alleging that 401(k) funds have been too expensive. Fund expenses are deducted from fund assets meaning that they directly negatively impact fund returns and reduce amounts that participants would otherwise have been able to accumulate in their retirement accounts. Said differently, fund fees are embedded in fund expense ratios, so the amount that employees pay is determined by how they are invested.   Traditional Approach to 401(k) Investment Selection Most 401(k) plans today offer a menu of mutual funds, selected from various companies based on a number of factors including investment performance and fees. Often plan sponsors retain a financial advisor to assist in identifying appropriate funds, but typically the employer retains full fiduciary responsibility for the selection and monitoring of funds.  Having a broad array of investment options across asset classes (stock funds as well as bond funds; domestic as well as international) and investment styles (large cap as well as mid and small cap) allows employees to create a diversified portfolio; provided, of course, they feel comfortable selecting their investments. And research shows that many employees don’t feel comfortable selecting and monitoring investments; that’s why many plan investment menus also include target date funds and default employees into them.  Target date funds are presented in a series, each targeting a specific retirement date (year) which corresponds to an individual’s investment time horizon. In addition to being well-diversified, target date funds also adjust their asset allocation over time, becoming more conservative as the retirement date approaches, which reduces an investor’s risk in accordance with his or her shorter time horizon.  Mutual Funds in 401(k) Plans  Mutual funds are a popular choice for 401(k) plans because many employees are familiar with them, recognize the brand names, and might even be invested in the same funds outside their 401(k). From an employer perspective, mutual funds are a comfortable choice because of their price structure, which often enables the various service providers associated with the 401(k) plan to be compensated directly from the funds’ expense ratio, meaning they are paid for by the participants.  While using mutual funds may be a convenient way for plans to pay for necessary and legitimate fees, having all these expenses embedded in the expense ratio makes it difficult for both employers and employees to understand the true costs of the fund.  While required fee disclosures are intended to facilitate understanding the complicated fee structure, there is little evidence that this has increased employer and employee awareness around hidden 401(k) fees.  If you think these expenses may be insignificant, think again. Administering a 401(k) plan involves many moving parts, carried out by a number of parties. Examples of the firms that may assist a plan sponsor with 401(k) investments and administration may include:     Investment Company Company that manages investment funds Custodian Holds assets in trust and processes transactions Recordkeeper Tracks each individual participant’s assets Third-Party Administrator Performs compliance testing, assists with government reporting Financial Advisor Advises plan sponsor on investment selection for the plan Accounting Firm Performs annual audit for larger plans (with 100+ participants or certain assets) Understanding Your Investment Fiduciary Responsibilities  Like most plan sponsors, the day-to-day responsibilities of your business leave little time for extensive investment research and analysis. Many plan sponsors engage service providers to take on the fiduciary investment duties. However, the scope of fiduciary protection provided by 401(k) providers can vary greatly.  Some providers disclaim any fiduciary responsibilities and simply make a menu of investments available, leaving the plan sponsor with the fiduciary responsibility and liability for choosing options for the 401(k) plan.  Some providers will agree to share your fiduciary investment duties. This level is referred to as ERISA 3(21) investment advice. Under this model, investment advisors or service providers agree to be subject to the fiduciary standards with respect to their investment recommendations and are subject to the DOL’s enforcement jurisdiction. But the plan sponsor retains the final discretion regarding which investments will be included in the plan and shares legal responsibility for each investment decision. The Betterment Approach  At Betterment, we believe there’s a better way when it comes to 401(k) investments. For starters, we provide a level of investment fiduciary protection, serving as your plan’s 3(38) investment manager. This means we assume full discretionary responsibility for selecting and monitoring the plan’s investment options, relieving you of fiduciary liability for selecting plan investments.  ERISA Section 3(38) Fiduciary Responsibility  As a 3(38) investment manager, Betterment will take on the following duties, moving them from your 401(k) plan to-do list to ours:  Develop an Investment Policy Statement. It is a plan governance best practice for 401(k) plan sponsors to adopt an investment policy statement that defines the strategic objectives for the plan's investments and the criteria that will be used to evaluate investments.  As the investment manager we are responsible for creating the due diligence process for selecting and monitoring investments and will select the investments for your 401(k) plan.  We will monitor investment performance and replace any investments that do not perform well or when comparable investments with lower fees become available.  With Betterment as your ERISA 3(38) investment manager, you are not responsible for monitoring our investment decisions. You have fully delegated that fiduciary duty to us.  One of the more challenging investment fiduciary duties is the requirement to analyze 401(k) plan fees and ensure only reasonable expenses are paid from plan assets, as required by the DOL Fee Disclosures rules (ERISA 408(b)(2)). This is no simple task for a busy employer trying to run a business. Exchange-Traded Funds (ETFs) As noted earlier, fee structures for traditional 401(k) investments can be complex, complicating the fee analysis for both sponsors and participants. Betterment, as a 3(38) investment manager, takes on the duty to monitor investment fees and eliminates many of the concerns associated with traditional 401(k) investment models because of its exclusive use of Exchange Traded Funds.  Compared to mutual funds, ETFs have a more transparent fee structure, which means the 401(k) service providers aren’t being compensated behind the scenes. With no embedded fees, all plan vendors have to charge clear and explicit fees for their services, making it easier for plan sponsors to evaluate, compare, and understand the true costs of plan administration. And it makes it easier for employees to see where their money is going. Investment Advice for Employees  Some 401(k) products that offer ERISA 3(38) services limit the investment management services to plan sponsor support, leaving employees on their own to decide how their savings should be allocated among the investments available. Betterment’s 3(38) investment management support extends to participants as well as plan sponsors. We recognize that professional investment support is crucial to helping your employees become more financially secure – in both the short term and long term. Specifically, Betterment helps your employees determine: how much it costs to retire, given their desired lifestyle and where they may choose to live; and how much to defer from today’s paycheck into the 401(k) plan to meet their long-term savings goals. By providing additional personal information such as household income, and already existing retirement savings balances, employees receive more tailored recommendations, including advice on how much they should be saving and which accounts to use.  Betterment will build a personalized investment portfolio to help each employee achieve their savings goals, and will allocate each portfolio across asset classes, giving employees diversified exposure to over 36,000 stocks and bonds from companies and governments in over 100 countries. In addition, risk is automatically managed over time, and the portfolio is regularly rebalanced to help keep the goal on track. A Smarter Approach to 401(k) Investing Betterment’s investment approach combines smart technology with low-cost, index-based ETFs to relieve employers from one of their most important fiduciary duties: having to select and monitor 401(k) funds. We also make it easier for employees to save for their future by creating efficient and diversified long-term portfolios on a goals-based platform.