The Markets September 11, 2015

GAO Identifies Reasons Most Plan Sponsors Use TDFs as QDIA

The fit with participant characteristics especially led to the decision to use TDFs as QDIAs.
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In 2013, up to 72% of defined contribution (DC) plan sponsors used a target-date fund (TDF) as their qualified default investment alternative (QDIA), according to an analysis of three industry surveys by the Government Accountability Office (GAO).

In its report, “401(k)Plans: Clearer Regulations Could Help Plan Sponsors Choose Investments for Participants,” the GAO identified several factors that led the majority of plan sponsors to select TDFs over other QDIAs. Several stakeholders the GAO interviewed generally said that plan sponsors looked for design simplicity, fiduciary protection, and a fit with participant characteristics when selecting a default investment.

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The fit with participant characteristics especially led to the decision to use TDFs as QDIAs. Plan sponsors interviewed by the GAO said they chose their QDIA type because it best fit the age distribution of their participant population. In one case, the sponsor stated that the age demographics of the plan’s participants ranged from 21 to 71, so it believed TDFs best fit the wide spectrum of participant ages.

Stakeholders interviewed and plan sponsors that responded to the GAO’s questionnaire highlighted specific reasons that could make a TDF an appropriate choice for a plan’s QDIA.

For example, several stakeholders stated that plan sponsors generally selected off-the-shelf TDFs because they are a conceptually simple, low-cost product that provides diversification and dynamic asset allocation throughout a participant’s career. Plan sponsors who selected off-the-shelf TDFs as their QDIA said these products have a simple design, provide age-based asset allocations at a low cost, and create appropriate retirement outcomes for participants who have little interest in investing and tended not to change their investment selections over time.

Stakeholders stated that plan sponsors generally selected custom TDFs because these products provide a more hands-on approach to investment management. Unlike off-the-shelf TDFs, custom TDFs allow sponsors to select best-in-class asset management to build a TDF series that meets the needs of the plan.

One plan sponsor told the GAO that her plan set out to develop a custom target-date glide path using plan specific demographic information and the current plan investment fund managers. As part of this process, a service provider selected a glide path that provided the best return for risk, based on participant demographics, income needs, and behavioral investment patterns.

Products September 11, 2015

Robo-Adviser Offers Integrated Recordkeeping and Advice Platform

Betterment founder and CEO Jon Stein tells PLANADVISER Betterment for Business is the only full-service platform providing recordkeeping and advice.
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Betterment, an automated investing service, announced the upcoming launch of Betterment for Business.

The new 401(k) platform will offer personalized investment advice for all participants. For plan sponsors, it will provide streamlined administration and fiduciary support. It will launch in Q1 2016.

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Betterment founder and CEO Jon Stein tells PLANADVISER Betterment for Business is the only full-service platform providing recordkeeping and advice.                                                                     

Plan administrators will have automated, easy-to-use tools so they can worry about their day-to-day responsibilities instead of whether their 401(k) is compliant, according to Betterment. Employers will be able to enroll new participants through a seamless, paperless onboarding process. The employer dashboard will enable companies to easily administer plans and assist them in meeting their fiduciary and regulatory compliance responsibilities.

Participants enrolled on the platform will receive a globally diversified portfolio of index-tracking exchange-traded funds (ETFs) with personalized advice in a goal-based investing framework that currently serves more than 100,000 retail customers. Participants will also be able to open and customize taxable investment accounts, traditional and Roth IRAs, and trust accounts—and view all side-by-side with their 401(k) accounts. The accounts will be intelligently tax-managed, together.

Stein says the reason it uses only ETFs is that Betterment finds ETFs are more efficient and have a lower cost than mutual funds. “We have pricing that appeals to the entire market,” he says. “For those with more than $1 billion in retirement plan assets, 10 basis points (bps) is the all-in price; the smallest plans pay 60 bps. We feel this puts us at a price point at the lower end of market, smaller than what we found when we were searching for a recordkeeper for our own plan.

NEXT: Provider search led to creation of business

Stein explains that Betterment launched its retail business in 2010. “Customers come to us and tell us about their goals, and we provide goal-oriented advice, whether their goal is retirement, accumulating wealth, or saving for children’s college expenses. We build a portfolio for them, tell them how much they need to save, make sure savings are tax-optimized, and monitor allocations—at a lower cost than if they were investing on their own,” he says. “It’s hard to find advice about how much you should be saving.”

According to Stein, Betterment for Business has been on the company’s roadmap from day one, but it was driven this year to put resources toward it after setting up its own 401(k) last year and looking for a recordkeeper. Betterment found some providers wouldn’t take its plan size, and even though it was not paying other providers for advice, the company found administrative costs to be expensive. “It cost about 80 bps all-in for our plan—more than employees would pay if they bought an individual retirement account (IRA) through Betterment—and for all that expense, employees weren’t getting any advice,” Stein says.

To build a better experience for itself and its peers, and in light of the Department of Labor (DOL) action on advice, Betterment developed a recordkeeping platform integrated with advice.

Participants can see all of their accounts in one place, retail plus 401(k)—and they will get the same experience Betterment’s retail customers do: a website, mobile apps and individualized advice. Earlier this year, Betterment announced a partnership with the Social Security Administration in order to integrate individuals’ Social Security benefits into their retirement planning.

“For plan sponsors, it will save them time because they get everything in one place and the system is easy to use,” Stein says. “For participants, they will have lower costs and better outcomes, because they will have more efficient investments as well as holistic advice about how much to save and invest. If the retirement system [in the U.S.] is going to be a defined contribution plan system, there has to be advice about what to do.”

To request more information on Betterment for Business, please visit www.bettermentforbusiness.com.

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