Rogue 4-0 One: Can Robo-Platform Vestwell Help Advisors Defeat The Retirement Deathstar?

A long time ago in a galaxy far, far away…

It was thought that when 401(k) plans were introduced to the universe, they would be a rebellious solution to fight the decline of company-sponsored pension plans. However, the numbers are in and they don’t look good for our heroes. According to the Bureau of Labor statistics, only 38% of Americans currently participate in a 401(k) and just over half have any workplace retirement plan at all!

Why don’t more companies in the Empire offer these plans?

To be clear, traditional 401(k) plans are an expensive benefit, especially for smaller businesses like medical offices, law firms and Jedi Knight training centers. Between participant fees, supplemental asset-based charges and extras for services like hardship loans, it’s not unusual to see administrative expenses upwards of 165 bps. Even when they are made available, eligible employees fail to sign up due to the convoluted enrollment process and mountains of paperwork required. That, in turn, exacerbates the retirement savings crisis.

The answer may lie in a combination of robo technology and enhancement of the advisor-client relationship. That is the logic that prompted Aaron Schumm, one of the founders of wealth management platform provider FolioDynamix, to trust the Force and create a new company called Vestwell.

Vestwell is a New York-based startup that promises to make retirement savings simple to understand, more transparent, and easier for companies to offer. The platform recently secured $4.5M in VC funding, and I was provided an opportunity to take it for a test drive with Schumm and Vestwell’s VP of Business Development, Elsa Chan.

Vestwell: A Fiduciary for the Post-DOL World

With the DOL fiduciary rule set for enforcement in April 2017, Vestwell offers financial advisors a turnkey solution to deliver retirement investing services to companies and their employees while meeting all requirements of the new law. “Vestwell is the industry’s first fiduciary, white-labeled retirement platform,” explained Schumm.

A typical 401(k) plan requires four services: custody, record-keeping, third party administration and investment selection. Vestwell has partnered with a third party administrator, an ETF strategist and a record-keeper and built a seamless solution, like a TAMP for 401k plan sponsors, Schumm noted. A key component of their offering is their assumption of both 3(38) investment fiduciary and 3(16) administrative service functions, which alleviates the possibility of employers being sued by disgruntled participants.

With 401(k) litigation on the rise and specific language enabling class action lawsuits part of the DOL Rule, handing off fiduciary responsibility may be a welcome proposition for plan sponsors and advisors alike.

Schumm offered that Vestwell’s self-described sweet spot is with independent RIA’s with under $20M in assets. But they are in discussion with much larger firms as well. There are 50 advisors currently using the platform and 600 more awaiting onboarding, according to Schumm.  This is excellent traction for any fintech startup.

In addition to solving the fiduciary headaches, Chan noted, the platform promises the convenience of a single point of access. Some RIA’s find themselves supporting ten or more different platform providers in order to administer their retirement plans. Providers range from behemoths like John Hancock to one-off CPA firms, creating a logistical nightmare of asset tracking and building new plans. Given the current state of RIA technology, a single platform that offers a broad range of options without locking you into proprietary products looks very attractive.  (See Should RIAs use Tactical ETF Managers?)

Robo-Inspired Onboarding with a Human Touch

401k plan sponsorsVestwell has taken the best parts of the robo platforms, such as intuitive user interface and paperless onboarding and applied them to the opaque and complex 401(k) enrollment process. A new plan is created in a sequence of 10 steps, with the platform logic guiding the advisor through key decision points to shape the optimal offering.

The result is a clear improvement over the conventional process, although some of the more technical aspects of the plan setup may still require a human conversation. To address that, Vestwell has partnered with a CPA firm that handles tax-related questions and is well-versed in the granular details of 401(k) plan design.

Why wouldn’t a plan sponsor select an automated platform like Betterment over Vestwell? Schumm explains that while roboadvisors may offer similar services at a lower fee, they usually cut the advisor out of the process completely. Vestwell is positioned to give advisors a tool that will help them deliver the service in a way that is regulation-compliant, cost-effective and scalable.  (See 7 Questions to Help Pivot Your Practice Towards Retirement)

Since Vestwell takes on almost all fiduciary responsibility for the plans, they have built some monitoring tools into the platform.  One aspect they keep an eye on is consistency in pricing by advisors, Chan explained.  All clients of similar size and complexity should be charged the same price.  If this is not the case, an alert will be raised and Vestwell will contact the advisor.

A Seamless 401(k) Experience for Advisor and Clients

401k plan sponsorsFor the end users, the platform interface is intuitive and uncluttered. In addition to viewing their account balance, employees can make changes to their deposit amounts, change investment strategies, and request loans, Chan described.

In the future, Vestwell plans to offer additional behavioral guidance in regards to risk exposure or long-term consequences of user decisions. Since savings rate and the ability to weather market conditions are key drivers of retirement outcomes, I believe this additional functionality should improve participant outcomes.

One of my favorite features of the platform on the advisor side is the proposal generation engine, which is streamlined and entirely white-labeled. Entering key aspects of a plan takes 10-15 minutes, and the resulting proposal report includes the basics of how 401(k) plans work, as well as the details behind investment strategies that range from conservative to aggressive.

One important feature that is missing is the ability of advisors to upload their own investment models.  Only the canned models from their ETF strategist partner are currently available.  However, this item is on their roadmap for 2017, Schumm assured me. (See 3 Asset Management Trends for 2017)

What is the Price of Rebellion?

401k plan sponsorsThe Vestwell platform is free to advisors. The total cost is borne by the plan participants. But Schumm wielded his light saber to chop the platform price down to between 1/4 and 1/3 of what major players like John Hancock or Fidelity charge.

The platform list price is 65 bps for the most expensive tier and decreases as the total plan assets grow. The tier levels are currently $3 million, $5 million, and $10 million.

Every proposal report includes a detailed comparison of the existing versus proposed plan components that provides excellent visibility into fees and expense ratios. In addition to offering lower platform fees, Vestwell monitors the consistency of the fees charged to plan clients by the same advisor. In a situation where a similar plan results in a widely different set of fees, the advisor will get a message alerting him or her to the potential issue.

What’s Next for Vestwell to Help 401k Plan Sponsors?

Vestwell’s roadmap includes an upcoming integration with Quovo for account aggregation as well as analytics that cal illustrate the consequences of participant decisions, which can be powerful tools to influence behavior directed towards long-term investing.

The platform holds the promise of improving the efficiency of the 401k plan sponsors for advisors and at a lower cost to participants. If the default recommendation to opt in all employees is chosen by more employers and if the Vestwell user experience keeps improving, they could see increased participation rates. From the employer’s standpoint, Vestwell NYC mitigates risks associated being a retirement fiduciary and streamlines their workflow.

I would recommend that any RIAs interested in growing their retirement offerings should take a look at this newcomer to the 401(k) space.

And may the Force be with you.