Online providers filling a void for small-employer 401(k)s

If it weren't for startup SaveDay, John Frankola would likely have shelved the idea of providing his two employees with a workplace retirement plan.

"When I looked at it in the past, it was cost prohibitive. It just didn't make sense," said Mr. Frankola, the Pittsburgh-based president of registered investment adviser Vista Investment Management LLC.

It didn't make sense until it suddenly did with the low-cost 401(k) plan SaveDay Inc. was offering. The plan cost significantly less than any of the 401(k) providers Mr. Frankola had considered, charging 0.35% of plan assets to employee accounts annually plus a modest investment fee ranging from 0.06% to 0.08%. After years of searching for a viable provider, Mr. Frankola at last was able to implement a 401(k) plan in late 2017.

"For a firm our size or even slightly larger, we would be paying double or triple or some- times even five times that amount," Mr. Frankola said. "With the offerings that are out there, you can be paying up to 2% of plan assets."

Indeed, plan sponsors with 10 participants and $100,000 in assets would pay an average of 3.96% of assets for record keeping, administration and investment services, according to the latest edition of the 401(k) Averages Book updated through Sept. 30. They would pay an average of 2.22% for record keeping and administration and an average of 1.74% for investments. For plan sponsors with 10 participants and $500,000 in assets, the combined cost for all three services would average 1.85%.

As the industry struggles with how to increase employee access to workplace retirement plans, a new generation of online 401(k) providers are stepping in to fill the void with low-cost, digital options for budget- and resource-constrained small businesses.

The new so-called "robo record keepers" are leveraging advances in technology and low-cost investment options, such as index and exchange-traded funds, to make their pricing affordable to a segment of the 401(k) market they say has been largely ignored. All are betting that their rock-bottom pricing will attract the millions of small businesses that don't offer retirement plans for their workers.

Some of these companies act as a combination of ERISA 3(16), 3(21), and 3(38) fiduciaries and others outsource the roles or help the sponsors assume the 3(16) fiduciary role.

The new 401(k) providers may be betting right. The majority of small business owners with between five to 250 employees (71%) cite high costs as a reason for not implementing workplace retirement plans, with 37% citing it as the main reason, according to a study of more than 1,600 small business owners conducted by the Pew Charitable Trusts in 2016.

"Small businesses have largely been underserved in this market for the last 40 years just because of pricing," said Kevin Busque, the San Mateo, Calif.-based co-founder and CEO of Guideline Inc., an online 401(k) platform that opened in August 2016.

The new 401(k) providers have managed to automate everything from record keeping and plan administration to compliance testing and reporting, a level of automation and integration that more traditional record keepers haven't been able to achieve, they say.

While traditional record keepers, too, have made huge investments in technology, they're hampered by legacy systems that they're reluctant to jettison, according to the automated 401(k) newcomers. "They have old computer hardware. They have old software code that maybe programmers are not even available for anymore," said Chad Parks, the San Francisco-based founder and CEO of online platform Ubiquity Retirement & Savings.

Ubiquity, which launched in 1999 as The Online 401(k), underwent a technology overhaul in 2016 and was built "from the ground up" using the Amazon web-services cloud, an investment that Mr. Parks says gave him "access to an incredible amount of computing power and data storage and secure infrastructure for a fraction of the cost that it would have cost him 10 years ago."

"I don't have to charge more because my infrastructure costs are lower," he said.

Today, about a dozen robo record keepers are providing highly automated 401(k) record-keeping and administration services to small plan sponsors with scores of other technology companies providing related automated services to the 401(k) plan industry. Because most have emerged since 2015, reliable data on the number and size of the new competitors was not readily available.

The low-cost plan providers, however, may only be able to meet a small business owner's most basic needs. While they give small businesses affordable options they would not otherwise have, they do not provide the same level of support and customization as traditional record keepers, said Fred Barstein, founder and CEO of The Retirement Advisor University in Jupiter, Fla.

"It's sort of like going into a shoe store and saying you can have any shoe you want as long as you wear size 9 1/2," Mr. Barstein said. "There's not a lot of customization."

Call center support for plan administrators and participants is also not as robust, and advisers and educational specialists are not typically available, Mr. Barstein said.

The robo providers "are good" for business owners who are willing to accept what the platform offers and "don't need a lot of hand-holding," he said.

For many sponsors of small plans, such as Mr. Frankola, that may be enough. Mr. Frankola was drawn to SaveDay not just because of its low cost. He was also impressed with the managed exchange-traded funds offered within the plan.

Participants in SaveDay plans can select one of five managed account portfolios constructed with indexed-based ETFs ranging from low to high risk that are continuously monitored, managed and rebalanced as needed.

SaveDay, like most record keepers, is able to provide ETFs on its platform due to its newer technology, something that traditional record keepers cannot easily do. Ubiquity, for example, gives participants access to five risk-based portfolios made up of index and exchange-traded funds and also allows them to buy ETFs directly.

While the online record keepers have the ability to offer ETFs, some choose not to. Human Interest, an online record keeper that launched in 2015, for example, decided not to offer ETFs in its portfolios, sticking instead to index funds.

Because ETFs trade throughout the day, they aren't as relevant for a 401(k) plan, said Roger Lee, the San Francisco-based co-founder of Human Interest Inc. "With a 401(k), you're not going to be day trading and you don't really care about the price being volatile throughout the day. It's actually not desirable," Mr. Lee said.

The new 401(k) platforms appear to be gaining ground. SaveDay, for example, says it has added more than 300 small business employers to its platform and amassed almost $20 million in assets since it launched in September 2016. Other fintech companies have posted even more dramatic growth. Guideline executives say the platform has signed on 7,300 small businesses with $1.25 billion in assets to date. And Ubiquity today serves some 7,000 small business owners with $2.2 billion in assets, according to Mr. Parks.

The growth is feeding their belief that they are helping to tackle the problem of employee access to retirement plans. But even they acknowledge the magnitude of the coverage dilemma.

"It's too big of a problem for just private business to solve for," said Aidan Yeaw, Boston-based vice president of product at SaveDay.

Alicia Munnell, director for the Center of Retirement Research at Boston College, is skeptical that new 401(k) providers will make a dent in the coverage problem, saying that while they have been around for a couple of years there's been no reduction in the numbers of workers not covered by an employer-sponsored retirement plan.

"It may be that five years from now we'll see a real change and that will be due to the efforts of the fintech people. But right now, I just don't see it," Ms. Munnell said.

The new online providers are brushing aside the skepticism, focusing instead on the significant market opportunity. Some 54% of workers nationwide — or 82.2 million people — do not have access to a workplace retirement plan, according to the Center for Retirement Research at Boston College.

For Ubiquity, the biggest opportunity resides with employers with less than 100 employees, 70% of which don't offer retirement plans, according to Mr. Parks.

"That's almost five million businesses that represent almost 50 million employees in this country who don't have the ability to save at work," Mr. Parks said. "For us, that's what we call a blue ocean."

As the robo record keepers see it, the only thing that's stopping them from disrupting the industry is their lack of brand awareness. "We're not a household name," SaveDay's Mr. Yeaw said. "We don't run Super Bowl ads."