Rise of the Machines- Robo 401k Record Keepers
According to a recent Wall Street Journal article (subscription required), well-funded technology focused robo record keepers are attempting to disrupt the staid 401k/defined contribution world just as they have done in other industries. But financial markets have been harder to crack for start-up tech firms and the barriers to entry in B2B 401k world might be even more difficult than the B2C market even if the wind might be at their back.
Let’s start with the positives. With the focus on fees by the press as well as litigation and DOL regs, smaller plans, where fees are generally more than 1.50%, might be attracted to robo record keepers offering low cost ETFs with all-in expenses of 0.25% or lower. Technology has dramatically changed since most 401k providers have started which means some of the systems are a bit antiquated (meaning expensive) with hard to navigate clunky front ends which are certainly not inviting. According to the GAO, only 14% of companies with 100 employees or less offer a retirement plan causing dozens of states to enact legislation or consider mandating companies of a certain size to make these plans available.
But let’s look at the realities. Retirement plans are sold not bought. Most companies, especially smaller ones, are too busy to focus on retirement plans and it often takes a persistent advisor to get them to act. And though smaller companies may suffer higher fees because assets are low and they are reluctant to write a check, they often need more help than larger plans who have larger HR staffs which costs money. The business models and pricing for most robos do not include advisors. Costs are lower because these robos are using all passive funds like ETFs which may do well in up markets but do not buffer losses in down markets.
Still, there is hope and VC money behind robo record keepers with some, like Betterment which passed 200 plans, focused on larger as well as smaller companies. Goldman Sachs, a savvy investor, bought Honest Dollar, a start-up robo record keeper with limited plans and assets.
More likely than disruption robo record keepers, like robo advisors in the B2C market, will partner with larger providers who have brand and distribution as well as advisor groups. Well-known brands like Vanguard, which is running circles around the B2C robo advisors, are more likely to be successful – in five years with most as a pilot and limited resources, Vanguard’s small market service focused on plans with less than $20 million has won over 6,000 plans and $11 billion in DC assets.
