What are robo-advisers, and what brought them into the 401(k) market?
posted by Nathan Fisher 10/05/2016
So what are robo-advisers, and what brought them into the 401(k) market? Like many other markets ripe for a shakeup, the 401(k) market has relied on a fairly standard set of options for small businesses looking to provide retirement benefits to their employees. To date, many of the 401(k) plans small businesses sponsor are pre-packaged services through companies with big sales forces who already have an existing relationship with those small businesses. Specifically, payroll providers and insurance companies tend to manage more 401(k) plan packages for small businesses than anyone else. Oftentimes these 401(k) plans are sold by local brokers who do very little but do take a cut.
This is where robo-advisers are starting to enter the picture. They’re looking to win business away from payroll providers and insurance companies by offering lower fees and demystifying some of the retirement process. They’re able to do this, in part, by offering lower cost funds, and going direct to the small business, thus cutting out the local broker. Furthermore, they use new tech to help to offset the services the broker should be providing, but may not be. The tech typically takes the shape of a software dashboard, where plain English instructions work together with an algorithm. These tools help plan managers—that might be a company’s owner, or an HR manager, or another executive—make informed decisions based on what actions tend to be the most popular for other plans in a similar situation, or which might be the best for their company’s stated goals or circumstances.
But keep in mind that this approach is truly self-service; it’s still that internal manager who ends up taking those actions. Ultimately, while these software tools are set up to help someone make informed decisions, it’s the responsibility of a company’s designated retirement benefits manager to do things like define plan eligibility requirements, monitor employee and employer contributions, and file annual paperwork, like the IRS form 5500.
Full-Service Solutions: Paving the Road Forward
In my opinion, the media attention that robo-advisers (or robo-advisors) have garnered is a signal that the 401(k) market is ready for some change. And change is needed since most American workers are, unfortunately, not on track for a dignified retirement. Of course, self-service solutions aren’t going to satisfy every company that has had trouble finding the perfect fit within the traditional 401(k) marketplace. So as robo-advisers work to disrupt the entry-level side, other advisers like us are focusing on offering new, more comprehensive solutions by going direct to growing companies.
Consider this: In the traditional 401(k) model, everything seems to be based on the idea that low contact is to be expected. A mid-sized company might hire a traditional broker to manage their 401(k) plan, and they can afford the fees that come with such a setup. That broker may be available to talk to the company’s benefits manager or to employees with questions about retirement planning, but if the client doesn’t actively reach out seeking help, they won’t be hearing much from their broker. If you don’t believe me, ask employees of a small business about the last time they sat down with their broker to improve their retirement situation.
But that’s the problem with the traditional “broker sold” model for many companies in this part of the market. Take a growing company with 50 employees. They’re not always thinking about retirement, and they might not know what questions they should be asking. Their employees may not either. They might not even know who to ask even if they did have a question, especially if they don’t have any contact whatsoever with the outsourced broker or the internal HR manager who administers their benefits.
I’m reminded of one small business owner who had a traditional 401(k) plan before hiring me. Each year he had asked his office manager to make sure the company’s annual 5500 forms were filed. He never thought much about it until he got a letter from the IRS telling him he was five years behind on his filings. The office manager had been literally filing the forms by putting them directly into a filing cabinet. This business owner learned the hard way that he needs assistance he can trust to make sure that nothing falls through the cracks. Clearly, for certain businesses, the traditional model isn’t comprehensive enough.
But I also believe that many small businesses require more of a personal touch, and I just don’t see how robo-advisers will offer that. Where robo-advisers would give employees tools to manage their own plans, we pride ourselves on a high level of service for both employer and employee, to help them do it. We invite all eligible employees to meet with us individually, and get one-on-one contact with one of our specialists. Most of the time, these meetings are face-to-face, and most employees utilize them. We find this typically results in increased participation, higher savings rates, and a greater proportion of employees getting a professionally-managed mix of retirement investments.
More options for small business owners expand adoption of 401(k)s
While the robo adviser and our full-service approaches may be very different, I believe both are good for the industry and for the businesses and employees we serve. They each provide a new innovative choice for smaller businesses and those growing companies that may not otherwise offer a 401(k) package to their employees. They each, in my opinion, provide a better value than the traditional “broker sold” payroll or insurance based 401(k) plan. While I don’t think that self-service is right for the majority of small businesses, I do applaud these new robo-style 401(k) advisers for offering an innovative new solution to help American workers better prepare for retirement. We need more innovative retirement solutions.