Crop of Startups Disrupting the 401(k) Industry

Anne Tergesen reported in yesterday’s Wall Street Journal that, “Disruption is coming to the 401(k) industry.

Led by technology entrepreneurs and backed by venture capitalists, a crop of startups have launched online 401(k) plans in recent months with the aim of bringing robo-style automated investment services to small businesses, many of which offer their workers high-cost 401(k)s or no retirement savings plans at all.

“The upstarts are pursuing a large market that has been relatively ignored until recently—a vacuum that has prompted some states to start requiring small businesses to offer retirement plans. Among companies with 100 or fewer employees—a group that employs about 42 million people, or one-third of the private-sector workforce—only 14% sponsor a retirement plan, according to an estimate by the Government Accountability Office.”

Ms. Tergesen explained that, “The robos, which feature online service and low-cost indexed investments, are also trying to win business from the insurers and payroll providers that have long dominated the small end of the 401(k) market. Among the smallest plans, fees can run as high as 1.5% of assets or more a year, according to data from 401(k) plan tracker BrightScope Inc. and fund-industry trade group Investment Company Institute. In contrast, fees for participants in plans with more than $1 billion in assets average 0.26% of assets.”

The Journal article also noted that, “But while the startups—whose ranks include ForUsAll Inc., Dream Forward Financial LLC, SaveDay Inc. and Captain401 Inc.—see big possibilities in the small 401(k) market, there are hurdles. One is the difficulty of selling plans to mom-and-pop companies, a decentralized market in which many employers lack the time, expertise and money to put plans in place. Another is rising competition from more established low-cost players, including Employee Fiduciary LLC, a company that entered the small 401(k) market 12 years ago, and fund-industry giant Vanguard Group Inc., which launched a small-business 401(k) service in 2011.”

More specifically, yesterday’s article pointed out that, “The startups say it is a promising time to enter this market. Amid growing concern about insufficient retirement savings, four states—Maryland, Connecticut, Oregon and Illinois—recently passed laws that require many small businesses to offer retirement savings plans. Lawmakers in New Jersey and Washington have authorized state-run marketplaces to help small companies that want to set up plans. Some two dozen other states and a few cities have either commissioned studies or are considering similar legislation, according to AARP, and Georgetown University’s Center for Retirement Initiatives.”

And Ms. Tergesen added that, “Many of the startups focus on plans with 50 to a couple hundred employees. Their pitch: Technology can reduce the time and cost of managing a retirement plan, making it a benefit that small businesses can afford to offer their employees.”

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