Many smaller businesses that wouldn’t typically be served well by the financial industry are being forced to create pension plans for their employees. Whether this is good or bad, these small businesses will need the absolute cheapest option in order to fulfill their regulatory obligations while simultaneously remaining afloat. Of course, when businesses need cookie cutter service to satisfy regulators, and need it at the lowest possible cost, there’s only one thing to do–hire a robot. The 401(k) advisor industry has been slammed in recent years for high fees and few options, so it’s no surprise competition is creeping into the space. Anne Tergesen writes in The Wall Street Journal that startup companies developing robots for financial advice are multiplying.
The upstarts are pursuing a large market that has been relatively ignored until recently—a vacuum that has prompted some states to start requiring small businesses to offer retirement plans. Among companies with 100 or fewer employees—a group that employs about 42 million people, or one-third of the private-sector workforce—only 14% sponsor a retirement plan, according to an estimate by the Government Accountability Office.
The robos, which feature online service and low-cost indexed investments, are also trying to win business from the insurers and payroll providers that have long dominated the small end of the 401(k) market. Among the smallest plans, fees can run as high as 1.5% of assets or more a year, according to data from 401(k) plan tracker BrightScope Inc. and fund-industry trade group Investment Company Institute. In contrast, fees for participants in plans with more than $1 billion in assets average 0.26% of assets.
“The 401(k) market is ripe for disruption,” said Cynthia Loh, general manager of robo-advisory pioneer Betterment LLC’s 401(k) business. “Everybody is trying to leverage technology to make things more efficient.”