The 401(k) industry may be the next slice of the financial services industry to be targeted by technology disruptors.
New fintech firm Dream Forward Financial is positioning itself as a low-cost 401(k) provider, which its founder says will offer better digital services and operational transparency than traditional providers.
“We see a big part of the reason why the retirement system is so flawed is that Americans save via retirement programs that are really expensive and confusing,” Grant Easterbrook says.
That's why Easterbrook left his analyst role at market research firm Corporate Insight to launch Dream.
“You see news reports that people are not paying enough into 401(k)s and IRAs and too many are putting off saving for retirement, and we were motivated to tackle that problem with a new 401(k) service,” he says.
“I realized there wasn’t anyone seeking to solve the underlying problems with 401(k)s, where a lot of America’s money actually is, reaffirming our view that the 401(k) is ripe for disruption."
However, Dream is not a pure robo advisor or PFM startup -- it is a 401(k) plan administrator that Easterbrook hopes can address some of the shortcomings of traditional defined contribution retirement plans.
Rather than trying to compete with bolt-on retirement investment advice providers such as Financial Engines, Dream Forward is going after the established 401(k) plan administrator such as Fidelity, Xerox and T. Rowe Price. It uses a third-party record-keeper on the back end.
“We’re a technology company,” Easterbrook says. “We add value with a beautiful, modern front-end website, a great user interface and low costs.”
Dream Forward charges a flat, all-in .075% AUM fee to clients, which Easterbrook claims is approximately half of the cost of the average defined contribution plan, and no fees to the business sponsoring the 401(k) plan. Dream Forward is not an asset manager.
“We focus on offering the best low-cost passive index funds,” Easterbrook says. “We don’t sell our own proprietary investments, and we have no conflicts of interest when it comes to investments.”
Another charge that Easterbrook levies at traditional 401(k) plan providers is that they focus on saving for retirement without taking other financial goals and expenses into consideration. In order to make 401(k)s work better, he says plan sponsors and administrators need to help plan participants save for all of their goals in one place.
“Human nature is short-term focused, and the 401(k) industry has horse blinders and ignores all of the non-retirement goals employees have -- for example, a new home, a car purchase or funding a college degree -- which is a big reason why employees don't feel confident enough that they can actually afford to save for retirement,” he says.
Dream Forward aims to address that problem with a simple enrollment process that asks plan participants about their goals, rather than focusing on a list of mutual fund options.
“We give them a roadmap of how much they need to save for each goal from their paycheck, and help them manage their financial life beyond retirement. This more holistic approach helps employees feel more confident that they can actually afford to save for a far-off retirement.”
“We ask people about their goals, gather information, and say ‘Here’s your paycheck, put this much toward a car, this much toward a house and this much toward retirement,” he adds.
“We give them a roadmap, and we handle the investments. It could be a target-date fund, but we recommend a default option of a customized managed account or suggested portfolio based on participants’ goals and their distance from retirement.”
The 401(k) industry is under pressure about plan fees from the government, the media, the public and most importantly, lawsuits from plan participants over high fees and conflicts of interest.
This includes the Tibble v. Edison class-action lawsuit, where participants in the California-based utility Edison International 401(k) plan accuse the sponsor of selecting investment options that charged excessive fees, for which the Supreme Court is currently hearing arguments.
“Nothing drives action like the threat of lawsuits, and we believe this Supreme Court case could finally force major change in this industry," he says.
“The industry is at an inflexion point. What are 401(k) administrators getting sued for? High costs, conflicts of interest and lack of transparency. We want to be the opposite of that. We also put a big emphasis on transparency and no hidden fees to nickel and dime employees and businesses.”
Building the business from the ground up, Easterbrook’s initial focus has been preselling on an invite-only basis, and Dream Forward has initial customers lined up. When it comes to adding the next batch of customers, timing is key,
“When the Supreme Court makes its decision on the 401(k) fees case, the level of awareness of plan sponsors’ liability is going to skyrocket, and there will be more headlines about people getting sued,” Easterbrook adds. “Our service will complement that trend.
“With a lot of negative coverage of major players and their flaws, we’ll look that much better in comparison. We want to position ourselves as an alternative as those [judicial] decisions come out and awareness of defined contribution plan liability spikes at that inflexion point.
“We’ll start with targeting small to medium-sized businesses initially and prove we’re viable, then go upmarket to bigger companies.”
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