401(k) Solutions for Micro Plans

Betterment, an automated investing service, recently announced the upcoming launch of Betterment for Business.

Betterment CEO and founder Jon Stein told PLANSPONSOR the company was driven to move forward on its plans to offer an integrated recordkeeping and advice platform after it searched for a provider for its own 401(k) plan. Betterment found some providers wouldn’t take its plan size, and found administration costs to be expensive even though it was not paying other providers for advice.

Stein also said Betterment for Business is the only full-service platform providing recordkeeping and advice. “For plan sponsors, it will save them time because they get everything in one place and the system is easy to use,” he said. “For participants, they will have lower costs and better outcomes, because they will have more efficient investments as well as holistic advice about how much to save and invest. If the retirement system [in the U.S.] is going to be a defined contribution plan system, there has to be advice about what to do.”

Several providers reached out to PLANSPONSOR to say there are other options for micro plans to get a bundled service, low costs and participant advice.

Eric C. Droblyen, president and chief operating officer of Employee Fiduciary, LLC in St. Petersburg, Florida, says Employee Fiduciary serves the micro market (usually up to 50 participants) as recordkeeper and third-party administrator (TPA). It provides custody, as well as investment selection help through its registered investment adviser (RIA) subsidiary, Frugal Financial, which provides 3(38) investment advice.

Employee Fiduciary uses the Relius ESP recordkeeping platform from SunGard. “When you do recordkeeping, you want a big company behind you because a lot can go wrong,” Droblyen tells PLANSPONSOR. “If there is a trade error or data breach, if you don’t have that money and scale behind you, you may not be able to compensate clients in the event of a problem.”

Ubiquity Retirement + Savings in San Francisco is another small business retirement plan provider. It also provides bundled services, and if plan sponsors do not get investment selection help from their advisers, Ubiquity has partnered with robo advisers such as Direct 401k, as well Morningstar for outsourced investment management, according to Ubiquity founder and CEO Chad Parks, who is based in New York City.

“My company has made great strides in developing proprietary recordkeeping software for a better user experience,” Parks also tells PLANSPONSOR. “In our opinion, current software doesn’t have good back office infrastructure to be efficient, so it doesn’t provide a good user experience.” Parks believes Ubiquity has a platform that Betterment can use as its back office, and they could partner to help more participants in micro plans save for the future.

Betterment has been providing goal-oriented advice to retail investors for five years, telling investors how much to save for their goals. According to Stein, participants served by Betterment for Business will get the same experience its retail customers do.

David Lyon, founder of Oranj, a practice management application for advisers, in Chicago, says Betterment has identified a need in the marketplace where the experience for the investor—broadly, not just in the micro plan space—leaves something to be desired. “Many times people do not know their options for getting advice or have someone on the other end to talk to,” he tells PLANSPONSOR. “And, Betterment has identified that the micro segment is ripe for disruption.”     

While Betterment is not the only other player in the participant advice space, its 401(k) offering is a natural extension of what they are doing today, Lyon says. “If it is offering portfolios or brokerage accounts for individuals, why not get into 401(k)s? It is looking to grow its business and gain additional assets.”

Parks says Ubiquity also offers participants advice about how much to save. He adds, “It’s really more about how to engage participants—how fun and interesting engagement is.” There is always room for improvement, “for example, with mobile applications,” Parks says. “We need to get away from the old thinking about it and do it in ways people can relate to.”

He noted that another provider advising participants about how much to save is ForUsAll. “It has an enrollment assistant trying to nudge participants about how much to save and how to invest.”

While Employee Fiduciary does not provide individual participant advice, Droblyen says there are many tools participants can use for advice about how much to save. “You don’t even have to have a plan provider for that,” he says.

Lyon explains that where Betterment allows plan sponsors to add advice services for participants, Oranj allows advisers to adopt those same capabilities Betterment has, while not changing their business models.

Oranj provides investment advisers with a digital platform to work with clients as well as prospects, and it focuses on two areas: enhancing client experience and increasing business development. “It’s not just a place for a client to sign in, but also for the adviser to use with a client or prospective clients. Advisers can show participants not only their 401(k)s, but everything they own, and it helps participants track goals and collaborate with advisers on their overall financial plan,” Lyon says.

Participants enrolled on the Betterment platform will receive a globally diversified portfolio of index-tracking exchange-traded funds (ETFs). Stein says the reason it uses only ETFs is that Betterment finds ETFs are more efficient and have a lower cost than mutual funds.

Droblyen says ETF recordkeeping is very hard, and he speculates the desire to use ETFs only is one reason Betterment needed to build its own platform. Schwab Retirement Plan Services, Inc. has a full-service 401(k) program based on low-cost exchange-traded funds (ETFs), but it administers plans from $20 million to more than $1 billion in assets.

Employee Fiduciary has an open architecture platform, and plan sponsors can use whatever investments they want for their investment menus, including ETFs. About 10% of Employee Fiduciary’s business has at least one ETF, according to Droblyen.

Ubiquity creates custom target-date fund (TDF) portfolios for plan sponsors, and uses ETFs as underlying investment options. However, clients can also select other investments. In addition, micro plan sponsors can open discount brokerage accounts for their 401(k)s.

Betterment charges an asset-based fee ranging from 10 to 60 basis points (bps)—for plans with more than $1 billion in assets, 10 basis points (bps) is the all-in price; the smallest plans pay 60 bps. Stein says this pricing is smaller than what Betterment found when it was searching for a recordkeeper for its own plan.           

Parks says new entrants into the market have gotten criticism for charging asset-based fees, especially when some just use Vanguard indexed funds, but plan sponsors need to consider what they are paying for. Ubiquity also charges an asset-based fee, and pricing averages 25 bps, which includes 3(38) investment management, as well as trust and custody services.

Droblyen says Employee Fiduciary’s position is that asset-based fees punish plans with high asset balances. “Why should those plans pay more [for the same services], there’s no relationship between services rendered and fees collected,” he states.

Employee Fiduciary charges a flat fee for service. “Everyone pays the same,” according to Droblyen. “Fifteen-hundred per year covers up to 30 eligible employees, additional employees cost $30 each.” He explains that his firm does charge an 8 bps fee on assets—which does not increase with assets—basically to pay for custody expenses.

“We look at ourselves differently than other providers—as a conduit for participant investment in 401(k)s, we look at ourselves as a commodity. Our goal is to be as efficient as possible so participants can keep more of their balances,” Droblyen says, adding that the only Employee Fiduciary services that are consultative and not a commodity are the TPA services, with which the firm consults with plan sponsors about plan design. “Plan design is a priority and one thing you cannot commoditize,” he states.