Does your 401(k) need robo-advice?

February 24, 2017 by Shin Inoue

In our opinion, probably not.

As a team of 401(k) and HR software veterans, we believe that there are vastly more important problems to be solved in most small and mid-sized businesses 401(k)s.*

Don’t get us wrong – building investment products like robo-advisors is fun, and some industry nerds might say sexy! But for the vast majority of potential 401(k) participants at SMBs we believe that a low-cost solution has already been invented: Target Date Funds.

Why TDFs are a great fit for the majority of 401(k) plans

Typically, target date funds are comprised of funds that invest in several different asset classes – mainly equities and bonds. These funds all have a target date – a year – usually the year that the investor reaches retirement age. TDFs are designed to gradually transition from a growth-oriented portfolio allocation at issuance to more conservative holdings as the target date approaches. The rate at which these funds shift their assets is known as their “glide path.” As the investor approaches retirement age, the asset allocation shifts to become more conservative, essentially managing the risk/return appropriately for the person’s age.

This is why TDFs are great default savings options for most 401(k)s. They handle the underlying asset allocation and manage down the risk for the investor, automatically. Like a robot. They are a low hassle way to get into a diversified, age appropriate investment line up. Like a robot. They can be very low fee. Like a robo. TDFs rebalance internally, handling dividend reinvestments and market movements automatically – they are essentially robo-advisors. In fact, representatives from robo advisors have said exactly the same thing – according to Wealthfront’s, counsel Roy Adams, “People keep thinking that there’s some kind of magic in the algorithms, but they’re not magic. They’re actually standardized, have been used for years and are academically robust.”

At ForUsAll, we use each participant’s age to automatically elect them into the age-appropriate target date fund as the Qualified Default Investment Alternative. In our opinion, the participant thus gets the advantages of an age appropriate investment without having to take any action.

Do robo-advisors drive better returns than TFDs?

In a 401(k) account, we do not find a statistically significant difference in returns between the better robo-advisors and the better TDFs.

Let’s compare returns in similar asset allocations between Vanguard TDFs and the Betterment portfolios (hats off to Betterment for transparently publishing their returns.) For the quarter ended September 30, 2016, we compared the quarterly, 1 year, 3 year and 5 year performance of two of Vanguard’s flagship TDFs (both with 90% equity allocation) to a similar Betterment portfolio.

Annual Performance

Quarter YTD One Year Three Years Five Years Ten Years
Vanguard 2045 – VTIVX 4.82% 7.54% 12.16% 6.86% 12.14% 5.87%
Vanguard 2060 – VTTSX 4.80% 7.50% 12.13% 6.81% na na
Betterment @ 90% equities 5.00% 8.20% 12.30% 5.40% 10.80% 4.90%


Sources VTIVX, VTTSX, Betterment

In some periods, particularly in the 2016 period analyzed above, the Betterment portfolio slightly out-performs the Vanguard TDFs. But over the three year and beyond periods the annual performance for Betterment is slightly worse.

Our point isn’t to say that the robos did a bad job constructing their portfolios – quite the opposite actually, they seem to matched the performance of the industry’s major players. That’s impressive!

But why recreate the wheel?

Small Business 401(k) Robo-advisors

Some robo-advisors are trying to port their B2C business model to the small business 401(k) provider space. Financial bloggers are positing that this business model shift is because the traditional robo-advisors are having problems profitably acquiring clients, “the combination of rising client acquisition costs and declining average revenue per client may be an outright death knell for the direct-to-consumer robo-advisor movement, as they approach the unsustainable crossover point where the lifetime value of a client, cumulatively, is less than the cost to acquire a single client (given that some have a mere average gross revenue per client of just $50/year!). Accordingly, it’s not surprising to see many of the early robo-advisor players pivoting in other directions, using their long runway of available dollars to try to find greater growth traction, with at best one or two that might manage to build a viable brand that survives.” source:

The general value-add from a robo-advisor is usually described as better investment advice coupled with low cost investments.

In the small business 401(k) market, ForUsAll strongly agrees that lower fees are a must. The small business 401(k) provider market is a racket, with some pretty excessive fees, so the robos succeed in addressing this major issue with their robo-401(k) solutions.

On the better investment side though… Now that a variety of quality, low-fee target date funds exist, it’s hard to say that a 401(k) plan needs a robo-advisor vs. a collection of age appropriate TDFs and the right default investments (this is good plan design, something a competent, traditional 401(k) advisor can handle. Why so many traditional 401(k) consultants stuff their clients’ plans with expensive, actively managed funds is a topic for another day).

We also think that there are advantages to working with a truly independent 401(k) focused advisor in both investment and plan administration advice. On the investment side, an independent advisor is not conflicted in recommending investment funds. It’s hard to imagine a robo-advisor, who has spent millions of venture capital dollars creating proprietary investment products, recommending a massive change to an investment lineup based on market performance. But a level-fee, independent advisor can be completely focused on driving an appropriate fund selection without any conflicts of interest. And on the administration side, independent 401(k) advisors can help regularly negotiate with a variety of recordkeepers, making sure that the plan sponsor is working with a safe, reliable and low-cost recordkeeping partner. Compare this to a robo-advisor who may have spent millions in venture capital building a proprietary recordkeeping platform – it’s hard to imagine that they would ever recommend a recordkeeper other than the one that they built, even if there are obvious risks to working with a startup recordkeeper.

If your small business is looking to upgrade its 401(k) plan, consider talking with one of our retirement consultants. We’ll provide you with independent advice, help you find the right recordkeeper, fundline up and get a plan design that helps drive employee financial wellness.

*ForUsAll was founded by 401(k) robo-advice veterans from Financial Engines. Financial Engines is probably the biggest robo-advisor on the planet, with a focus on serving Fortune 500 retirement plans. Our founders were on the product, design and investment teams who helped develop and bring to market the company’s flagship “managed accounts” product – basically, what has become the largest independent robo-advisor. When ForUsAll’s founding team left Financial Engines, the program helped manage over $55 billion in assets. According to InvestmentNews, it now manages $113 billion.

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Shin Inoue
Shin believes that every American deserves a fair shot at retirement success, and as a founder and CEO of ForUsAll is committed to delivering on that promise by modernizing and simplifying the way people plan for retirement. Prior to ForUsAll, Shin was Director of New Business at Financial Engines, a pioneer in democratizing access to high quality, personalized investment advice that today manages more than $100 billion. He led the design & development of Financial Engines’s two flagship products, which helped people effectively plan for and strategically spend in retirement. Shin holds an M.A. in Operations Research and a B.S. in Mathematical and Computational Science, both from Stanford University. In his free time Shin enjoys watching the West Wing and Friday Night Lights reruns with his wife Gaby. Shin plans to drive an awesome food truck around the country when he retires.
Shin Inoue

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