As more than 75 million baby boomers enter or near retirement, all eyes will be on the defined contribution retirement plan market — most notably, what investors are putting their money in and whether they are working with a human adviser or automated investment service.
Financial Engines, the largest automated defined contribution managed account provider, recently announced a business relationship with Wells Fargo & Co. to manage asset allocation for all of the company's 401(k) plans by mid-2016. Currently, the retirement robo is the largest in the market, with $104 billion in assets under management according to its latest Form ADV filed on March 31.
"We have been doing this for a long time, and 401(k) plans are quite complex," said Paul Gamble, executive vice president of distribution and institutional services at Financial Engines. "It's a unique advantage we continue to have as new players enter."
Mr. Gamble said there were no other relationships in the works at this time, though the company was always looking for DC plan sponsor partnerships.
The market is expanding.
Retirement planning is perhaps one of the hottest areas of specialization in the industry right now as U.S. retirement assets total nearly $25 trillion, including $7.6 trillion in IRAs and $6.8 trillion in defined contribution accounts, according to an
Investment Company Institute report.
However, there isn't much competition in the space yet, as most robo-advisers are focused on winning business from retail investors and advisers.
An exception is the retirement-oriented robo start-up Blooom, which was founded in 2013 and has $104 million in AUM, according to its Form ADV filed on Aug. 4.
Morningstar, which also manages retirement accounts, has $38 billion in AUM and 1 million enrolled DC plan participants.
There is plenty of opportunity in the space, as many 401(k) participants who aren't auto-enrolled in a target-date fund need investment guidance.
Linda York, vice president of syndicated research and consulting at Cogent Reports, said her recent research on 401(k) sponsors found that mega-plans with $500 million or more in assets are using managed accounts as a default instead of the typical target-date funds. This could be the opening that robos need to jump into the retirement industry.
"We typically see the mega-plans are trendsetters and tend to adopt it before anyone else does," Ms. York said. "The fact that more of these mega-plans are managed accounts as the default could be a little bit of a precursor to robo-advice-type models making inroads into 401(k)s."
Betterment has been one to jump on such trends. Jon Stein, the chief executive of the robo-adviser with $2.5 billion in AUM across its retail and institutional side, said the company wanted to eventually get into managing 401(k)s when it released its
retirement calculator in April.
"It is an interesting space,” Mr. Stein said in an email. “There is clearly a lot of room for improvement, but it's obviously a very large undertaking for a variety of reasons.
“For starters, it would require its own dedicated team within the company,” he said.
And yet, many robos have been slow to enter the retirement arena, especially as there are so many hurdles to achieving success.
For starters, selecting the proper investment mix for a 401(k) plan is not as simple as managing a regular portfolio might be.
"The challenge of 401(k)s is it's a different combination of funds," said Grant Easterbrook, co-founder of DreamForward Financial, a 401(k) administrator. "There are different quirks and rules to plan."
Mr. Gamble said Financial Engines has specific software to run these plans differently, which takes various rules, contribution levels and a range of funds into consideration. Robo-advisers would have to have a more individualized, tailored portfolio for each plan participant.
Still, one of the driving forces behind the move to managed accounts may be the fact that it's a more personalized option, Ms. York said, adding that larger employers are taking the first steps to offer this sort of advice for DC plan participants because these plan sponsors are trying to push their employees toward a greater degree of retirement readiness.
Another hurdle would be to integrate robo-adviser technology onto a recordkeeper's platform to be able to offer the automated investment tool to plan participants, she said.
Brock Johnson, the head of retirement solutions at Morningstar, agreed, saying that there would need to be a direct feed to DC plan recordkeepers so that transactions and plan-specific information could be shared.
It's also a challenge to get employees to
get engaged with their plans, Mr. Easterbrook said.
According to an Insured Retirement Institute report, 19% of baby boomers who were offered the chance to participate in an employee-sponsored 401(k) plan declined to do so. And 23% of boomers with these accounts have taken out a loan or made an early withdrawal from their plans.
In the end, robos may not be going for the 401(k) market because they want to explore other options, Mr. Easterbrook said.
"They can get into insurance, lending, bank accounts — a lot of them are focusing on white-labeling," Mr. Easterbrook said. "There are lots of other opportunities for robos."
