The 401(k) Quick Lube
Oil changes. Pizza delivery. Flights to Vegas.
What do they all have in common?
Well, for the most part, the amount of time we expect to have any one of those things completed is somewhere between “now” and “yesterday” depending on how hungry you are of course.
They’re fast, inexpensive, and convenient services – all of which we can appreciate in the right setting. Heck, my family just got back from a week-long road trip and the last thing we wanted to do was cook a meal!
But fast, inexpensive, and convenient isn’t the right mix for everything and that includes your 401(k).
I’ll talk about the good, the bad, and the ugly – things to pay attention to and look out for – regarding FinTech’s launch into the 401(k) service provider space!
A Trend in FinTech
Financial Technology – or FinTech – is an emerging niche industry devoted to making financial services more efficient by using new, innovative technology. One of the more well-known offspring within the FinTech world has been the robo-advisor – web-based applications that use crazy-math and science (algorithms), along with a simplified user experience, to manage investments.
The idea is that a robo-advisor can reduce or even eliminate irrational, emotional human behavior – that’s a good thing and one of the reasons why there have been so many companies launching their own versions of robo-advisors!
With over $4.7 trillion – yes, trillion with a T – in 401(k) plans across the US, it was just a matter of time until the progression of the new age robo-advisor made its way into 401(k) plans. I say “new-age” because inside 401(k) plans, ever since about 2006-ish, there were some services being offered that acted/looked a lot like robo-advisors – basically the hipster version of robo-advisors, if you will.
Now that more and more FinTech companies are targeting the 401(k) space, as a plan sponsor and as an employee, you should be aware of the pros and cons of working with these firms. Here are some observations to consider – the good, the bad, and the ugly – followed by some questions you should ask yourself – or the provider you may be considering – before jumping in with both feet.
To most people, living in a state (Minnesota) where you can fish on frozen water for a longer period of time than you can on open water, is a bit irrational. Not to say a robo-advisor can help us with staying busy in the winter, but being able to mitigate some of the other irrational behavior we as human beings are prone to when it comes to investing is huge! More good points for 401(k) FinTech providers:
– Initial User Experience & Interface: Should be called “TechFin” because these companies are mostly Technology companies first, Finance second. Easy to use in most cases for the initial sign up.
– Sexy Marketing: Think about the Apple vs PC commercials a few years ago – if you are even old enough to remember what a commercial was before TiVo – the “young, tech-savvy Apple customer wearing a hoody and jeans” next to the “aging, tie-wearing PC user.” After seeing that, would you want to be the tech-savvy kid or the boring old guy? The FinTech crowd knows marketing.
Cable and internet companies were notorious for offering introductory prices to new customers while the existing customers were paying higher rates. Basically, costs were subsidized – I’m sure there are some government intricacies that I’m understating here but that’s the picture I’m trying to paint for you.
Anyways – many FinTech firms with exciting potential have no customers from the start to build cash flow so they are typically backed by investment bankers and venture capitalists. In 2015, within just one FinTech “program” alone, six firms raised $296 million in venture funds. That’s great – but when a company is advertising their fees are lower than traditional wealth management firms, it’s not necessarily apples to apples.
In fact, one provider suggests no fees for their services…but if referred to a select “partner,” that partner pays them a negotiated commission. More bad points:
– Lack of Industry Experience: Even with the new Department of Labor regulations surrounding fiduciaries and 401(k) plans, the complexities were deep to begin with. Just being able to spell 4-0-1-k isn’t going to cut it.
– Over-Simplified: Yes, we all like simple. But can something be too simple? Well, if mistakes within a 401(k) plan are found and penalized, yes; it can cost a company a lot of money. An example of a provider over-simplifying – with their sexy marketing – is that they imply that their specific product offering is “producing” the tax benefit received and it’s unavailable elsewhere.
– Priority of Resources: In the same vein as experience, a FinTech firm is going to place a higher priority on web development, design, interface, and marketing. Another nameless example has five current openings for staffing: 2 software engineers, 2 sales, 1 operations/executive assistant. The estimated salary ranges for the engineers were double that of the others.
– User Experience & Interface II: As beautiful as most of these sites and interface designs are, there is still a huge disconnect between the amount of $/time/resources put into them vs. participants actually going back into the application regularly and getting a return on the value that just isn’t applicable. For automated investing, there is no need for constant “checking in” or looking at the 401(k) account – even though many of the FinTech 401(k) providers tout easy, at your fingertip access.
– Additional Fees: Some of the FinTech 401(k) service providers are aimed at participants only – where they can “link up” to the service provider in a way where they can then charge their fees (if applicable) on top of any fees already associated within your plan. In some cases, a participant could be paying the 401(k) plan advisor (if there is one) as well as the “FinTech” advisor.
Buying a car. Paying for insurance. Deciding to rent or own. Funding college. Funding retirement. Cost of getting married, having a baby or even getting divorced. Asking for a raise. Taking care of aging parents. These are just a small handful of over 30 different unique decisions every person will have to make throughout their life when it comes to money – either spending it or saving it.
The majority – not all – but the majority of the FinTech 401(k) service providers in the market today, at their core, offer one service: robo-advisor investment management. If your life was a bicycle wheel and all of the spokes make up the financial aspects of your life, investment management is one spoke – although important for the integrity of the wheel – it’s just one spoke.
Questions to Ask Yourself and/or Potential FinTech Service Providers
1. How do their services fit into our overall benefits strategy?
2. How long have you been in the retirement plan industry?
3. How many full-time employees do you have?
a. Contract workers are common, mostly design, web, etc. in start-up/tech
b. Of those full-time employees, what is their average industry experience
4. How many clients do you have?
5. What are the approximate assets under management?
a. Try not to let them “wiggle” out of these; these are some of the most common questions on RFP’s (Requests For Proposals) for choosing 401(k) vendors – they may say something to the effect, “We’re a start-up, we have venture capitalist and that information is confidential.” Well, if they are a Registered Investment Advisor – providing investment advice for a fee – it’s actually public information; they are regulated by the SEC (Securities Exchange Commission). Every year, RIA’s have to update this information and it’s available through this website.
6. How are you paid?
7. What stage of funding are you in? (if applicable)
a. www.techcrunch.com is a pretty cool website to see some of the information on start-ups and their funding activity
8. Are you a fiduciary to the plan and plan participants?
Technology is an important aspect of our lives – which may be the understatement of the year. Understanding the capabilities and limitations to some of this newer tech with regards to how you evaluate it, is going to be pertinent because of the scrutiny retirement plans will be faced with in the near future. The retirement plan industry is in need of this type of disruption – it’s exciting to see the infancy of the next generation of tools available to employers to help their employees with their financial wellness.
But you may not necessarily want to be a guinea pig or the beta tester – and if that’s okay with you or you have the patience – just make sure your expectations are realistic as well, because you may just end up with a two-day hangover, a greasy cardboard box, or a bunch of stuff you didn’t really need in the first place.