401K Begging for Disruption in the US

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This blog post is a call to action to all entrepreneurs interested in financial services and fintech in general, and the asset management space in particular. Let me, by way of a prolegomenon, paint the market picture.

The 401k market in the US is worth +$4.5 trillion as of 2015 and approximately 50 million workers participate in one or more plans. So far so good as the opportunity is material. Fees range from 0.5% to 1%, that is fees an employee is “allowed” to understand, fees that are disclosed in a somewhat transparent way. When one starts inquiring and uncovering hidden fees and transaction costs, the tally can easily shoot over 3% in some cases. Let’s assume the average all in cost is 2.25% for mathematical simplicity. Do the math, 2.25% of $4.5 trillion equals $101 billion. Let’s round that to $100 billion. Now, as an entrepreneur, you have the motive which is also material.

Thinking about disrupting the equivalent of $100 billion in fees makes my mouth water as an investor. I am surprised the Sillicon Valley has so far only focused on traditional investment vehicles with the Robo movement, see my previous post here on the subject. It can be only a matter of time for the 401k market to feel the full force of a tech disruption though. Granted, the 401k industry is much more complex than other corners of the retail investment industry. On average, the value chain is comprised of a variety of actors, each of whom are very specialized, where custody, compliance, regulation, state and federal law all conspire individually and collectively to create a hairy operating framework. Still, disruption is only a matter of time.

Initially I see two ways through which disruption could occur:

– Direct to consumer play that provide services to employees and helps them systematically optimize their 401k portfolio and directs them to lower cost products. D2C plays are always expensive, that is the rub.

– B2B play that helps sponsors, i.e. employers, deploy cost effective plans. Where should the B2B solution be deployed – at custody level, at asset management level, at fiduciary level – that is the question.

To summarize, we have the opportunity and the motive. It is up to the the startup team to build the means in order to facilitate the perfect crime disruption.


Pascal Bouvier

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

  • Damian
    Posted at 22:33h, 03 July Reply

    I’ve spent a lot of time looking at this space – to me, here are the most likely outcomes:
    1. Wealthfront, Betterment, et al move into this space. It’s a logical extension of what they are currently doing.
    2. Vanguard, et al (old/older guard) move into it charging 0% on funds managed – 401k plans will consist entirely of Vanguard mutual funds (ETFs present an interesting challenge).

    Wealthfront/Betterment would need to make money off of a very small slice of the money – say 0.25%. Vanguard will make money from money in their funds/ETFs and will charge 0% to manage.

    The key to this market, in my opinion, is the individual benefits companies – and Vanguard/Fidelity are much more connected to these folks.

    Summary: great market, great opportunity – but I’m not sure how you deal with the larger players who seem to be pretty quick to recognize their advantage.

    • Pascal Bouvier
      Posted at 11:31h, 05 July Reply

      The skills and operational DNA one has to acquire to compete in the 401k space are very different than those Wealthfront and Betterment currently have. Plus the legal and regulatory complexity is what I believe West Coast venture backed businesses have shied away to date.

      • Damian
        Posted at 08:45h, 06 July Reply

        Regardless of current capabilities, I think that the West Coast VCs were sold on investing with these companies with the idea that they would offer a number of investment (and perhaps other) products – they’ve said as much. Thus, I assume they’ll enter a number of spaces – 401k being the most obvious given their current skill set.

        That being said, another place where disruption could come is from a company like Zenefits – disrupt the whole benefits space where the 401k is just one annoying component of it from the company perspective.

  • Damian Roskill
    Posted at 22:47h, 03 July Reply

    Additional comment:
    “– Direct to consumer play that provide services to employees and helps them systematically optimize their 401k portfolio and directs them to lower cost products. D2C plays are always expensive, that is the rub.”

    Forgot to mention this in my last post: there are a number of these services – most notably from Financial Engines – but none of them have really taken off. The reason: people hate dealing with finances (because the financial industry has made it so) – I can’t remember the stat exactly, but basically people would rather clean their bathroom than deal with their financial situation.

    • Pascal Bouvier
      Posted at 11:32h, 05 July Reply

      True but none have aimed at disrupting the space. Financial Engines is focused on arming the incumbents, not so much lowering costs to 401k account holders. No?

      • Damian
        Posted at 09:12h, 06 July Reply

        Not sure I understand your point around lowering costs. 401ks are obviously issued/controlled by a company, not an individual. Thus, the individual has no ability to select a different 401k, nor change the base-level investment options.

        Services like Financial Engines (and a host of others) therefore seek to provide portfolio optimization within those choices. That includes services like portfolio selection – and that generally takes into account costs as a factor. Thus, most would direct the individual to invest in an index fund over an actively managed fund at a higher cost.

        My point is that these services exist – as both direct-to-consumer and via an individual’s company (Financial Engines can be delivered this way) – and they’ve seen very low adoption. From my research, the reason for this is because managing your 401k is seen, in the best case, as boring or intimidating – and in the worst case the 401k itself is a “nice to have.”

        Thus, disruption is unlikely to come from a D2C play. It turns out that what people want for their 401k is more like a pension (old is new!) – someone or something to manage their finances in a smart way. Most consumers don’t understand fees and the effect on investment performance – so it not something they care about. What they want is “fire and forget” – something that a D2C play will have difficulty executing. In contrast, Zenefits (or other plan providers) could offer something (either their own or via a partnership with either a Vanguard or a Betterment).

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