Future of Investing
How startups are edging out larger players on small-business retirement plans
- Startups are making inroads on low-cost retirement plans for small businesses, an area where larger players can't always be competitive.
- Startups often have the edge over incumbents on fees, technology and customer experience.
For Jason Beer, owner of Pizza by the Sea, a Florida chain restaurant with three locations, offering a retirement plan for his employees is a priority. He began offering his 45 employees a 401(k) in January of this year. But finding a plan that was affordable and offered a good user experience was no easy task. "I didn't want my employees to get 'fee'd' to death," he said. "It's hard for small businesses -- for some colleagues in the area, they think it's a huge paperwork burden and something that would take away from running their business." Red tape and higher fees for small-business customers influenced Beer's decision to sign on with a startup 401(k) provider, SaveDay. SaveDay is a startup that began offering low-cost retirement plans to small businesses this year at a fraction of what they would have to pay with most legacy providers. Small-business owners like Beer are often faced with the challenge of trying to find a low-cost plan that offers an easy customer experience. SaveDay and other retirement startups are zeroing in on a gap in the market for smaller businesses, offering lower fees and personalized user experiences that many larger companies can't easily provide. According to financial information and technology company BrightScope, large company 401(k) plans -- those with over $100 million in assets -- almost uniformly have fees below 1 percent, with the largest having fees less than 0.5 percent. By contrast, smaller plans are pricier, with average fees of 1.5 to 2 percent, with many costing over 2 percent. Smaller plans typically cost more to administer, but with the steep fees, it can make retirement plans prohibitively expensive. But in recent years, startups have amped up the competition for small-business plans, offering lower fees and better customer experiences enabled by technology. "We benefit from having a blank space; we said we wanted to deliver a best-in-class 401(k) that's the envy of Fortune 500 companies and be able to deliver it to small companies," said Aidan Yeaw, vp of product at SaveDay, which charges participants a 0.45 percent fee. What SaveDay and other startups offer is a technology-driven experience that makes it easier for employees and businesses to get information about their plan. Yeaw said he offers customers a mobile-optimized dashboard where employees can quickly find out information about the performance of their plan along with projections of future retirement readiness. Customers are also able to get in touch with live customer support via chat and email. While price is an important factor, tech companies also say they can offer a digital-first customer experience. Dream Forward Financial, a 401(k) startup that targets small to mid-sized companies, has a chatbot customers can reach out to for questions. The chatbot can also help break down the terminology around investment language. "We built an AI chatbot to talk to employees to help demystify the process; there's so much jargon," said Dream Forward Financial co-founder Grant Easterbrook, who added that customers have the option to escalate inquiries to humans if necessary. Customers can ask three types of questions, including inquiries about a retirement account, definitions of financial terms and help on personal finances (for example, "How can I save better?"). The use of algorithms is also an area where startups are forging a path. Betterment's retirement plans for businesses use an algorithm-based platform to determine asset allocation and offer personalized advice. For Betterment, the lack of legacy technology made it easier for the company to build a technology tool from scratch that's suited to customer needs. "We give plan participants true advice on allocation and how much they should be saving," said Tom Conlon, head of client relations at Betterment for Business. "It's really hard for incumbents to do that because their technology is old and it's harder [for them] to deliver that on-demand financial advice on a digital platform, and a lot of incumbents are afraid to raise their hands and say, 'We'll be fiduciaries to the plan.'" For the past year, Betterment has offered IRAs for Uber drivers, a partnership Conlon said was a natural fit for two tech companies. Despite competition heating up in the startup space for the small-business retirement plan market, many see incumbents as their primary competitors over other startups. To Easterbrook, the market is big enough to accommodate multiple players. "In our world, it's all about getting prospects [from incumbents]," said Easterbrook. "The nature of this beast is that it's a massive space. It's more about getting someone out of their own plan that they know is bad; they haven't dealt with it, and they're putting it off." The U.S. retirement market has grown 45 percent since 2010, adding about $8 trillion to the sector, according to PwC. Despite the small chunk of the market that startups are aiming for, they can't help but have some impact on bigger players, said one industry analyst. "Fintech is a threat to all retirement plans, regardless of size," said Kathleen Sullivan, director for PwC Financial Advisory Services. "We are seeing incumbents identify this as a threat and either build their own fintech capability or buy someone that has already figured it out." Sullivan's observation speaks to Goldman Sachs' acquisition last year of Honest Dollar, a startup whose mission was to offer affordable retirement plans for small businesses. Still, some in the traditional retirement savings world say fintech companies can't respond to all customer needs. "I do not believe that customer expectations are brought on by fintech," said Jesse Taylor, director of marketing for retirement at financial services company NFP. "You have to remember that although the participant is the end user, it is the plan sponsor or employer that is the consumer of the 401(k). Just as the latest technology has not driven real estate sales to a pure online buy, technology and transparency is leading more and more employers to seek out knowledgeable consultants to help them navigate the complexity of fiduciary governance and plan design." Others say the larger players don't feel a big enough challenge from startups to consider them a threat, particularly for small-business retirement plans. While incumbent insurance providers may go "downmarket," larger legacy companies operating in the retirement savings space have little incentive to get into the small-business market, said consultant and industry analyst Maria Amado. "The bigger players are perfectly content to wait until you have $5 million, $10 million or $20 million until they take a look."