Software Firm Says It Is Ready to Disrupt DC Industry

Software developer NextCapital Group says it is building digital portfolio management and advice delivery tools that have the potential to reshape the defined contribution (DC) retirement plan industry.

NextCapital Group (formerly Business Logic) says it is leveraging a combined $6 million in new venture capital funding, mainly from Russell Investments and the Transamerica Ventures Fund, to continue development on automated portfolio management technologies it hopes will someday replace traditional target-date funds (TDF) with inexpensive managed accounts. The goal of the venture investment, according to Russell and Transamerica, is to “shake up the $700 billion [TDF] market and bring managed account advice to anyone with a defined contribution plan.”

The firms tell PLANADVISER that pending technologies from NextCapital Group will allow their asset management businesses to deliver personalized, professionally managed, institutional-caliber 401(k) portfolios at about half the cost of traditional managed account arrangements. According to NextCapital Group, these digital managed accounts will automatically collect individual investors’ demographic data to create and regularly rebalance highly customized portfolios that take the place of TDFs or traditional managed accounts on the DC plan’s investment menu.

The digitally enabled managed accounts can be optimized for use as a DC plan’s qualified default investment alternative (QDIA), explains Dirk Quayle, president of NextCapital Group. He adds that the pricing will “vary depending on the specific provider and arrangement, but it will look much more like a traditional TDF than a traditional managed account in terms of price.

“We developed this defined contribution managed account software platform over many years, with tens of millions of dollars invested,” Quayle tells PLANADVISER. “In the distant past, we had a relationship with Ibbotson Associates, which you know is now part of Morningstar. When that relationship broke up, we decided to shift our efforts so the system would be more open and could work with more investment methodologies. This round of funding is the next step in that effort.”

Quayle says the NextCapital technology innovations will allow for the efficient mass delivery of different investment methodologies as managed accounts, whether from Russell or Transamerica or another investment services provider. He says plan sponsors will be able to work directly with providers to establish digitally enabled managed accounts on their plan’s investment menu—but the tools will also be available for use by specialist retirement advisers in value-add efforts.

For example, if a plan adviser has spent significant time and effort developing a lineup of funds tailored for a specific plan, NextCapital’s technology can then help this adviser efficiently build and manage individual participant portfolios that effectively allocate assets across the lineup, all based on individual participant needs.

“We are hoping to answer the question of how you set up an adviser to wake up every day and look across thousands of plans and hundreds of thousands of participants, and take note of where someone has an inappropriate allocation, or where another corrective action is necessary,” Quayle explains. “We’re basically taking their investment methodology, and we are helping the adviser push it out far more quickly and cost effectively to the individual participants.”

As explained by Quayle, the NextCapital digital managed account platform can be tailored to fit different regulatory frameworks within which managed accounts can be established—namely under the Pension Protection Act or the Sun America Opinion, which helped establish the regulatory framework necessary for managed accounts. Before the SunAmerica opinion, advisers lacked key protections and many hesitated to offer true investment “advice” to retirement plan participants covered by the Employee Retirement Income Security Act (ERISA)—opting instead to provide non-discretionary “education.”

Quayle says earlier versions of the portfolio management technologies already serve more than 500,000 retirement plan participants with over $70 billion in assets. For example, NextCapital Group’s solutions already underlie Russell’s Adaptive Retirement Accounts (ARAs), which are personalized managed account products that utilize customized asset allocations based on participant information including age, gender, salary, current account balance and other factors. The ARAs undergo automatic quarterly allocation adjustments to increase the probability of participants reaching their savings and retirement income goals, according to Russell (see “Russell Brings Together TDFs and Managed Accounts”).

Josh Cohen, managing director and head of institutional defined contribution at Russell, says his firm hopes the additional investment with NextCapital will result in continuing innovating in areas such as account aggregation, automatic salary deferral escalation and portfolio decumulation. These are important pieces of managed account services, he explains, which have not yet seen sufficient technical development or automation.

In addition to Transamerica Ventures Fund and Russell Investments, other investors in NexCapital Group are FinTech Collective, Kelvingrove Ventures and the Vermont Seed Capital Fund. Georg Schwegler, CEO of Transamerica Ventures Fund, says his firm is also “excited about the prospects for a NextCapital partnership in the 401(k) market.”

“Billions of dollars are withdrawn from retirement accounts each year,” Schwegler explains. “Increasingly, asset management firms such as Transamerica want to be in a strong position to manage the assets of customers who have accumulated retirement savings through products offered by their other lines of business. NextCapital’s investor dashboard—coupled with its in-plan managed accounts—will enhance Transamerica’s ability to roll customers’ 401(k) plan assets into a reliable income stream throughout an increasingly longer retirement.”

Both Cohen and Quayle said they have heard about a pending patent infringement lawsuit that could potentially impact digitally enabled managed accounts—but neither would comment on whether patent-related concerns could derail this type of technology innovation.

In short, a patent suit filed by GRQ Investment Management claims Financial Engines (a well-known provider of digital managed accounts) violated two patents its holds, numbered 7,120,600 and 8,229,825, by “making, using, selling, offering to sell, and/or importing, without license, directly or through its customers, managed account services, such as its Personal Asset Manager Program or customer programs such as the Vanguard Personal Online Advisor, Vanguard Managed Account Programs.”

Another potentially infringing service from Financial Engines listed in the complaint is the Financial Engines’ Income+ product, which provides a computer-based method of providing distribution recommendations from an investment account to a retirement plan investor (see “Financial Engines Accused of Patent Infringement”). Financial Engines tells PLANADVISER that it “intends to vigorously defend these allegations.”

More information on the partnership and technology offerings is available at