Next-Generation 401(k) Robo Takes On DOL Head-To-Head

FolioDynamix founder creates advisor-sold 401(k) robo-platform for the post-DOL rule world

Aaron Schumm first got a taste of the frustrations business owners face in setting up retirement programs while still at FolioDynamix, the ground-breaking cloud-based wealth management platform he helped to found in 2007. Despite having employed technology to streamline many of the aspects of wealth management for the advisors he served, Schumm found himself still in the Stone Age when it came to setting up a 401(k) for his employees.

“It was really, really painful,” he recalls.

“What happens is, the advisor provides a solution, and in this case it was the John Hancock 401(k). They give a PIN number you can call, and you design this program with the advisor,” he explained. “It’s very, very complex process. There’s a series of a 1000 variables. You’re checking boxes and you decide what mutual funds you want to offer. And as the company, as you are checking these boxes, you’re assuming liability for anything that happens in the 401(k) plan.”

Schumm sold FolioDynamix for $199 million in 2014. After a two-year hiatus, he turned his attention to the nearly $7 trillion defined contribution market, a sector that has recently been roiled by the DOL’s fiduciary rule.

Enter Vestwell, Schumm’s new advisor-sold 401(k) platform, which provides an all-in-one technology-driven solution with TPA, recordkeeping, custody, investment management, communications and education at low cost – all while assuming all fiduciary risk. That means fewer decisions and less legal exposure for those decisions, a formula that takes a lot of the pain out of 401(k) design for small- and mid-sized businesses.

“Folio was awesome, and I’m very, very proud of the FolioDynamix platform, but it was focused on the very, very affluent. In a lot of ways, we were just making rich people richer,” said Schumm. “With Vestwell, we’re focused on the vast majority of the population, the 75% of Americans whose only source of investment assets is their defined contribution or 401(k) plan. This is to help clients and everyone in the United States. I want everyone in the United States that works for a company to have the ability to have a retirement program either for themselves or their employees.”

Advisor-sold solutions for the retirement market

The independent advisor is the focal point of Vestwell’s strategy. “Most of the robo-advisors that are servicing the market are going after companies directly, knocking on the doors of businesses,” says Schumm. “We’ve focused on working with the independent advisor and giving advisors the tools to help their clients in that space. So rather than knock on the doors of companies, we’re allowing the advisors to build on the relationships that they have in those areas of the country and service them in that same capacity but with better tools.”

Chris Mills, executive vice president and head of operations at Fort Lauderdale-based Kovack Advisors, is one of the early adopters. His firm is currently rolling out the Vestwell platform as Kovack Choice 401(k) to the 400-some advisors in the RIA group.

“Ever since the DOL announced it was developing a new fiduciary rule, the issue has been on our radar as far as: how are we going to comply, what tools are we going to need, what firms are we going to partner with. It will have a significant impact to our business and to our daily operations,” said Mills.

The Vestwell platform met Kovack’s needs in a two critical ways. “If you’re an advisor out selling a plan to a client, there’s a couple of things that are absolutely mandatory. The first is it’s got to be easy. It’s got to be turnkey. It’s something you can sit down with the client and walk through with them, so that they’ll be able to understand and follow with you and be an easy process,” said Mills. The Vestwell platform, with its streamlined interface met this criteria.

Specifically, the platform allows for some customization, offering profit-sharing, safe-harbor and non-safe harbor plans. But by design it reduces the number of decisions plan sponsors and their advisors must make. “We help guide people into the appropriate plan based on who they are and what their company actually is. So there’s flexibility in what we offer, but we try to narrow the focus in a guided approach,” Schumm explained. “We basically tell people what they should do, not just what they could do.”

Moreover Vestwell’s platform builds certain kinds of plan design “best practices” into its structure. Auto-enrollment is the default option. “We found that when you actually auto enroll people, almost 90% of them stay in that program and continue to invest alongside their employer – versus an opt-in where only about 40% of people actually opt into the program,” says Schumm. “Our ultimate goal is to try to make sure that people accumulate as much as they can through their defined contribution plans that are offered by their employers. We’re trying to help people as much as possible to educate them to that process.”

Ease of use is one criteria, says Mills, but the other important one is cost, especially in an environment where the DOL is scrutinizing fees so closely. “Any retirement plan we offer has got to be acceptable in a pricing structure. The client has to be okay with the fees they pay, and if it’s an existing 401(k) that you’re trying to move over, the new program’s fees have got to be in line with the fees that they’re already paying,” Mills concluded.

Vestwell plans are less costly than competitive solutions. The platform manages expenses by offering low-cost, passive ETF strategies that meet a variety of risk/return objectives – and also keeping administrative costs low by negotiating vendor fees in bulk and leveraging technology to achieve economies of scale. “Rather than a platform that costs 150 basis points off the shelf, we’re able to reduce that by half or more. And, in doing that, we create an environment in which advisors can service their clients in a meaningful way without having to charge an egregious fee.”

As of late October Kovack was introducing the program to a few of its retirement-focused advisors with a plan to roll out the program to the whole sales force in early November.

Everybody wins

Schumm added that, while the DOL fiduciary rule may, at first be disruptive, it will ultimately be good for everyone – advisors, customers and the service providers that support them. “I love what we’re doing because we’re doing what’s right for the advisor, what’s right for the plan sponsor and what’s right for the employee. Everyone wins,” Schumm said. “Whether it’s the DOL now or something down the road, who knows, right? I look at this as, we’re there to help advisors and their clients.


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