Robos Set Their Sights on Retirement Plan Providers

by on Dec 06, 2016

In just a few years, digital advice – or “robo” advice – has almost become a table-stakes offering in the brokerage industry. While much of the attention paid to digital advice focuses on the wealth management industry, fintech firms can be found throughout the financial services ecosystem, including services that aim to disrupt banking, payments and loans. Until recently, defined contribution retirement plan providers had largely evaded disruption, but that has changed in the last year. Firms like Betterment, Dream Forward Financial and Honest Dollar offer low-cost alternatives to traditional employer-sponsored retirement plan providers. In addition to offering sponsors cheaper plan options, they also provide participants access to digital advice services.

Along with the firms mentioned above, Corporate Insight identified and evaluated the services provided by several new firms targeting DC plan sponsors and participants in our newest syndicated report, Next-Generation Investing: The Incumbents Arrive. However, at the time of publication in November 2016, few firms had actually made concrete advances in their attempts to win over plan sponsors. The biggest success story was perhaps Honest Dollar, which was acquired by Goldman Sachs in March 2016 and reached $147 million in AUM by October. Goldman Sachs’ interest in the firm caught the attention of many industry observers, but Honest Dollar’s AUM figure hardly represents disruption in the trillion-dollar retirement space.

It is no surprise that the retirement industry – with entrenched players and complex arrangements between multiple vendors for services like fund lineups, administration and record-keeping – is proving difficult to disrupt. Recent announcements, however, hint that these alternative retirement plan providers may be gaining traction. Betterment and Dream Forward both made headlines recently that indicate they are gaining a foothold in the industry.

As an InvestmentNews article reported last week, Betterment announced that over 300 businesses have now enrolled in its Betterment for Business DC retirement plan service. This is a significant development considering the service has only been available for approximately 10 months. To date, most of the plans Betterment has converted are for small companies, but the firm made a point to emphasize that it recently won a $25 million plan that previously worked with a traditional 401(k) provider. With the potential implementation of the DOL looming, we expect to see Betterment, which operates as a conflict-free fiduciary, continue to grow Betterment for Business in the coming year.

Along with Betterment, Dream Forward also made recent headlines. Founded by Corporate Insight alumnus Grant Easterbrook, Dream Forward provides a similar service as Betterment for Business, offering low-cost DC retirement plans, but with a twist. As reported in Employee Benefit News, Dream Forward unveiled an artificial intelligence (AI) component to its retirement platform – a feature they believe represents the next evolution in the robo advice phenomenon. According to Easterbrook, Dream Forward built its AI not to beat the market or optimize portfolio allocation, but to augment human advisors’ responsibilities by “replicating the hand-holding and coaching that financial advisors give clients to keep them on track to achieve their retirement savings goals.”

As far as Easterbrook and Dream Forward are concerned, a marriage of digital and human advice represents the future of the industry, one where technology can serve as the first line of defense and intervene when it observes participants making emotional investing decisions (e.g., decreasing contribution amounts in response to market fluctuations) or when they are confused with administrative questions. This in turn will allow advisors to focus on more value-add services and help participants find solutions for their specific problems. To that end, Dream Forward also announced a major partnership with a traditional advisor firm, Barnum Financial Group, which serves roughly 250,000 clients. The partnership will provide Dream Forward’s clients access to Barnum’s 300 FAs, while Dream Forward’s service will enable the advisors to have more fruitful conversations with participants and engage in more targeted outreach.

So do these announcements spell the end for traditional DC retirement plan providers? Of course not. But just as we saw with the evolution of robo advice in the brokerage space, incumbent retirement plan providers would be wise to pay close attention to these new services. At the very least, traditional retirement plan providers could stand to learn from these startups’ new innovations as they seek to create a more engaging and financially rewarding experience for participants.