Boxed Wholesale, an online bulk grocery shopping company, aims to take the hassle out of going to warehouse stores like Costco and Sam’s Club for people to shop. All you do is click on products found on the website and the company delivers goodies to your door in about three days.
The company wanted the same online ease of use and experience with its 401(k) provider, so in January, Boxed became one of the first 50 companies to sign up with 401(k) robo-adviser Betterment.
Most Boxed employees were new to 401(k)s and wanted to learn online, said Elana Krieger, Boxed vice president of human resources. In addition, Boxed offered traditional 401(k)s and Roth versions that allow participants to pay taxes upfront so withdrawals at retirement are tax-free.
“Many employees hadn’t invested in a 401(k) plan before so they were nervous about making choices,” Krieger said.
The sign-up process was easy and intuitive, she said. Users answered a few financial questions and within a short time had a 401(k) account. Although she isn’t directly responsible for the daily administration of the plan, Krieger said she hasn’t heard any complaints from her team.
“I could explain this system to my 13-year-old,” Krieger said, who has worked in human resources for several years, including at a Fortune 100 company. “It’s much easier than traditional investing.”
The time for robots to enter the 401(k) space is here, experts agree. It’s not exactly the “Shall … we … play … a … game” supercomputer from the movie “War Games,” but robo-advisers use advanced analytics. They make it simple for users to input data and other personal information into a sophisticated algorithm to come up with the appropriate balance of stocks, bonds and other investments.
Robo-advising is quickly becoming a new way to provide professional financial advice at a low cost for individual investors. The costs are lower — sometimes more than half as much as using a human adviser — because data are driven by computer programs, and investments are typically passive indexed funds that don’t require a human to pick the mix.
At the end of last year, the industry claimed about $12 billion in assets among the top dozen providers in the retail or individual user space, according to research consulting firm Aite Group. The company projects assets to reach $285 billion by the end of 2017, mostly because of existing investment companies rolling out new services.
But that’s on the individual side. So what about the rise of robo-advice on the $6.8 trillion currently in 401(k) plans?
Tell Me About Yourself
In many ways, robo-advisers have been here for a while. Companies like Financial Engines Inc. and Morningstar Inc. have been working with plan providers and plan sponsors for years, creating computer-based programs to offer personalized investment advice for 401(k) participants. Betterment crossed over from the individual side in January to offer a full-service 401(k) robo-platform.
The process is simple: Users answer a few questions including their financial information and risk tolerance and, boom, they get a financial plan. Some programs allow more information to be entered or a consultation with a human adviser; the more info a user gives about their financial life, the better the program works, experts say.
“The great need for robo-advice is through defined contribution plans,” said Jerry Bramlett, managing partner at Redstar Advisors. “Technology is improving, and people are becoming more comfortable in using it.”
Sign me up, said 29-year-old Amanda Oliver.
Oliver orders takeout online, she shops online, and she even works with a therapist online.
So it probably goes without saying that she would want financial advice for her 401(k) online as well.
A content and brand strategist at online advertising agency OrionCKB, Oliver will soon become eligible to participate in the company’s 401(k). Currently she has no money in retirement savings and said she needs as much help as she can get to make the right investment choices.
Oliver said she wants to use a computer-based program to help her figure out how to invest her retirement dollars. The other options — traditional, sometimes face-to-face meetings with an adviser or attending sign-up seminars — don’t work for this millennial.
“I’m all about when it is convenient for me, and I’d much rather be on the computer when it’s on my time, than spending two hours with someone,” Oliver said. “A financial adviser sounds like something for someone with a million dollars.”
With the fast uptick of robo-usage on the individual side, some experts say the 401(k) robo-market is about to crunch a lot more numbers. Studies show participants want help, and those who get it wind up doing better growing their retirement accounts. A 2014 Financial Engines and Aon Hewitt joint study showed that participants getting professional investment help had a median 3.3 percent higher rate of return compared with others managing their own accounts.
“It’s a huge market, and there are a number of people who are vastly underserved,” said Chris Jones, Financial Engines’ executive vice president of investment management and chief investment officer. “We think that needs to change.”
Buts About the ’Bots
But not everyone is thrilled with robo-advising. Some say it’s not sophisticated, there aren’t enough investment choices, and it can’t react to participant decisions such as taking loans in the way a real adviser would.
“Robo-advising is nothing more than an if-then statement. If this happens, then this is what you do,” said Steff Chalk, executive director for The Plan Sponsor University. “I don’t see [human] advisers going away.”
Chalk said the robo-movement is here to stay in the 401(k) market, but his anecdotal evidence tells him it will develop slowly.
“Plan sponsors don’t have enough of a comfort level to say that they are going to turn” their plans over to a robot, he said.
Financial Engines agrees. Last year it acquired The Mutual Fund Store for $560 million to add more human advisers to its strategy. Financial Engines’ users can go to any of The Mutual Fund Store’s 125 locations to get the help they need.
“Different people need to receive advice in different ways,” Jones said.
But there is another problem. Earlier this year, the U.S. Labor Department issued a rule that said providers giving advice to 401(k) plan participants have to act in the best interest of those people. The Labor Department added that providers can’t give advice that steers participants to their investment products to make gains that way.
It sounds straightforward, but it poses a lot of problems for robos in the individual space that might be thinking about crossing over to the 401(k) world, said Michael Kitces, financial blogger and director of wealth management at Pinnacle Advisory Group.
Companies such as Betterment and Financial Engines work well under the Labor Department’s rule because they base fees on total investment assets, not on a particular product, he said. The problem happens when investment management firms come in and try to use the robo-adviser as a way to deliver their products, Kitces said.
“ETF providers are buying robo-advisers so they can put their manufactured product into the robo as a distribution channel,” Kitces said in May blog post. With the new Labor Department rule, “they have to figure out how to level [fees] across the entire structure.”
One thing that certainly leans in favor of the robo-movement is fees. It can be hard to determine advisory fees in traditional 401(k) plans because oftentimes the fee for the service is paired or wrapped with other features offered by the provider. A typical advisory fee on the individual side is about 1 percent for large accounts.
Higher advisory fees can have an effect on account balances over time. The Labor Department uses an example of a 401(k) account balance of $25,000 having a 7 percent rate of return over 35 years (with no annual contributions). If fees were held to 0.5 percent over that time, the account balance would be $227,000. Paying 1.5 percent in fees would bring the account to $163,000, a 28 percent reduction because of a 1 percentage point change in fees over time.
Financial Engines works with employers’ existing 401(k) investment lineup to help workers come up with an appropriate investment mix. For its professional management service (where it makes all the decisions on accounts), it charges between 0.15 percent and 0.6 percent annually, with an average advice fee being 0.4 percent, depending upon the size of the account.
Betterment is different from its predecessors because it is what CEO and co-founder Jon Stein calls full-stack service; the provider does everything — from giving advice, executing trades and providing statements, all at a lower cost.
“Our aim is to set up all employees for success,” said Cynthia Loh, Betterment for Business’ general manager.
Betterment uses exchange traded funds, or ETFs. These funds mirror existing indexes and are passively invested — meaning no human (including the participant) is actively picking the stocks. Its fee is also based on the size of the account and charges between 0.15 percent and 0.35 percent.
The strategy works, Redstar Advisors’ Bramlett said, because just like traditional defined benefit plans, it does not allow the participant to make the heavy investment decisions. He noted the Financial Engines/Aon Hewitt study that found that 60 percent of people using professionally managed target-date funds also dabble in other available investments. Failing to exclusively stay in the target-date fund increases the risk of investing too much in certain sectors.
“They don’t understand that the target-date fund is already diversified,” Bramlett said. “Trying to educate employees on how to invest is a lost cause.”
Betterment’s Loh and Krieger from Boxed agree that the concept isn’t for every company. Users can’t invest in specific stocks, bonds or mutual funds — only ETFs. The strategy focuses on driving outcomes for people who historically want someone else to do the work.
“It’s hard to get employees to do this,” Loh said. “We help them get better outcomes.”
Krieger added that companies should at least consider Betterment’s concept when shopping for a provider. Betterment’s investment strategy is simple and may not appeal to every business, but she said she has let other HR execs know the robo-concept has worked well for her company.
“It’s been pretty seamless,” she said.
Patty Kujawa is a writer based in the Milwaukee area. Comment below or email firstname.lastname@example.org.