Having developed robo platforms for retail clients and advisors, Betterment is expanding further into the asset management industry with a 401(k) offering for businesses.

As can be expected from its CEO, Jon Stein, the scope is grand as the digital-first firm sees a $4.6 trillion market ripe for disruption.

"We see this as one of our key lines of business, alongside our direct-to-consumer and Betterment Institutional. We will someday manage hundreds of billions, and ultimately trillions of dollars for Americans," Stein boasts.

The Betterment for Business platform seeks to bring the firm's simple design and digital approach to plan administration. The robo firm says for plan sponsors with more than $1 million in assets, there will be no upfront fee, and AUM fees will range from 10 to 60 basis points.

Portfolios will consist of ETFs, and participants will receive personalized investment advice; accounts will also be managed to maximize tax efficiency, which Betterment claims no other provider offers. The offering is expected to launch in the fourth quarter.

Stein says the company's own experience setting up a 401(k) plan for its employees last year spurred the decision to launch the product. Betterment began with the assumption it would be quick, given their staff and knowledge in investments, he says, but it became a five-month process as they struggled to develop a plan to their satisfaction with what was available.

"There were no good options," Stein says. "It was very difficult to understand the pricing of the options we were presented with. It was a mess." For its 154 employees, Betterment ultimately chose a low-cost Vanguard plan and tapped Ascensus to be its record keeper.

The Department of Labor's recent fiduciary standard proposal only added momentum to the effort, he adds.

"We feel it was a bit of an invitation to us," Stein says. "It's almost as though they are out there saying, 'Will someone please create a good, fiduciary advice model in the defined contribution space?' That model doesn't exist today as far as we can see."

(Interestingly, on several occasions, DOL Secretary Thomas Perez has used Betterment's main digital competitor, Wealthfront, as an example of a low-cost alternative for investors that is also acting as a fiduciary firm.)

The 401(k) offering will not conflict with the relationship Betterment has with Fidelity, Stein notes. The robo has partnered with the financial services giant for its advisor product.

"That relationship is purely on the Betterment Institutional side, and it's a relationship where they promote Betterment Institutional to their 3,000 advisors," he says. "It doesn't touch the retail offering, and it won't touch the 401(k) offering."

Stein didn't view the new Betterment offering being in a competition with Fidelity's 401(k)s - Fidelity has $1.2 trillion in retirement assets under management, while Betterment has $1.4 billion. "We have retail customers, and they have retail customers. We offer IRAs, and they offer IRAs. There's nothing new here."


Leading 401(k) providers declined to discuss Betterment's new offering.

But there have been concerns about digital competitors entering the space. Research firm Cerulli Associates highlighted how e-commerce companies Alibaba and Tencent jumped into asset management in China.

Betterment isn't the first digital platform to enter the 401(k) space either. There are bolt-on retirement investment advice providers such as Financial Engines and, earlier this year, former Corporate Intelligence analyst Grant Easterbrook launched Dream Forward Financial as a low-cost 401(k) provider.

"We think it's a validation that the multitrillion dollar 401(k) industry is primed for disruption," Easterbrook says. "Even if it is just a tiny fraction of the market, if you look at what has happened in the robo space, they have a relatively small slice but an outsized impact that has resulted in all these changes."

Rob Foregger, CEO of NextCapital, which powers enterprise 401(k) digital advice solutions for institutions including Russell Investments, says Betterment's move into the defined contribution market is a logical extension of their business model.

"Winning in retail over the long-run means winning inside the 401(k). There's seven trillion in DC assets and $380 billion in DC assets rolling out into and IRA every year. Too big to ignore, and perfect for scalable personal advice."


Prominent digital firms attempting to break into the 401(k) market will face an uphill challenge, and Betterment's brand recognition isn't enough to scare competitors, says Morningstar equity analyst Michael Wong.

"There are already pretty entrenched players in there and I think it will be hard for them to gain traction," Wong says. "Most of those players already have very deep connections with the retirement plan sponsors and generally they've already been offering something very close to institutional quality type of investment options compared to the robo advisors."

Investment Company Institute spokesman Mike McNamee was circumspect about Betterment's announcement.

"Robo advisors are a means to an end, not the end, and personal relationships with investors are still very important," he says. "Even those who are innovating around the use of online advice don't believe robo advisors completely replace the many services the fund industry and fund intermediaries provide when interacting with investors."

Ironically, if the DOL fiduciary standard proposal passed and smaller retirement plan sponsors lose access to retirement plan advice, as predicted by industry critics of the proposal, Wong says that would be an opportunity for robo firms to exploit.

Foregger agrees: "The pending fiduciary standard will make digital advice the de facto solution inside the defined contribtion market over the coming decade."

Stein acknowledges the competition, but sees beyond it. The future roadmap for the company's offerings, he says, could potentially include other financial products, such as insurance. "We know that this will take time. We're not just building something and hoping that next year we'll dominate the space. We're building for the long term." 

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