"Robo" adviser aims to cut retirement-plan costs

An automated investing service plans to bring a cheaper, computerized product to the 401(k) market, but some industry observers predict the company, Betterment, faces an uphill battle to win over the small- and medium-sized businesses it seeks.

Betterment, which manages over $2.6 billion in individual accounts, accelerated its plans for a 401(k) offering after struggling to find an affordable retirement plan for its own employees last year, spokesman Joe Ziemer said.

The cost of the service, to launch early next year, will range from 0.1 percent to 0.6 percent annually, plus another 0.1 percent for the underlying investments, which are low-cost exchange-traded funds, Ziemer said.

That total plan cost of 0.2 percent to 0.7 percent compares to an industry average of about 1.6 percent for plans with less than $1 million, according to Mike Alfred, CEO of BrightScope, a financial information and research company that tracks 401(k) plan costs and performance. Investment options offered by the plans can add another 1 percent or more to participants' costs.

A number of factors have conspired to keep retirement plans expensive for smaller businesses, Alfred said. Companies with fewer employees don't offer the economies of scale offered by large ones that can spread the costs of paperwork and compliance over tens of thousands of participants. Larger companies also have the financial clout to wrest better deals, while smaller firms are often ignored by big providers, he said.

Small business owners, meanwhile, may not be as sophisticated about their available options as big companies with large human-resource departments, and might be more inclined to opt for brand names they recognize, Alfred said.

Betterment has "an uphill battle because the entrenched players spend billions of dollars to stay there," Alfred said.

Betterment joins at least two other start-ups, Captain401 and Guideline Technologies, that recently announced competing plans.

Others have tried to crack the market without success.

Personal Capital, a Betterment competitor, piloted a 401(k) service a few years ago but shuttered it after six months, CEO Bill Harris said.

Small businesses "are usually sold a 401(k) by their insurance guy or their payroll service, and it's an afterthought," Harris said. "It's a hard thing to change."