💡 Key takeaways:

• Robo-advisors provide software-based management tools for investing.
• Portfolios managed with a robo-advisor generally tend to be cheaper to use than human-advised portfolios. These cost savings can add to your company’s bottom line.
• Robo-advisors intend to keep portfolios optimally diversified, which could lead to better returns over time for plan participants.
• Guideline offers six retirement portfolios that are managed under a robo-advisor model.

There are many benefits to offering a 401(k) plan. A retirement benefit can encourage employees to stick around and help businesses attract new talent. Yet, not all 401(k) offerings are equal. In fact, what's under the hood of your 401(k) plan could significantly impact your team's outcomes.

If you're deciding what features to look for in your company's retirement plan, there are many reasons to consider a plan that uses a robo-advisor for portfolio management, also referred to as robo-investing. In this post, we'll look at what it means to use a robo-advisor, their impact on 401(k) plan fees, and how a robo-advisor diversifies investments in a 401(k) plan.

Let’s get started.

First, what is a robo-advisor?

(Hint: It's software that automates portfolio management based on the participant's needs.)

Suppose your workplace includes individuals with varying experience levels, from entry-level to seasoned executives. In that case, your company's 401(k) offerings need to be able to serve everyone.

Fortunately, when businesses select a 401(k) provider that uses a robo-advisor, it can be easier than ever for workers to access a personalized investment portfolio. Robo-advisors are software-based services that automate portfolio management based on a participant's specific information, including their age, retirement goals, and how much risk they're comfortable with.

For participants, the first step to using a robo-advisor is typically completing a short questionnaire about their age, expected retirement date, and comfort with different levels of gains and losses. Then, the robo-advisor suggests an investment portfolio built around their answers. The younger a person is, the more likely the robo-advisor is to suggest a portfolio with a higher allocation in stocks than bonds. The closer someone is to retirement, the robo-advisor may suggest a more conservative approach.

It wasn't too long ago that a human advising team was responsible for making all of these decisions. Over the last decade, technology has changed that. Today, robo-advisors may not only be more efficient at managing portfolios, but the software also can cost far less to operate than a team of human portfolio managers. This can lead to cost savings for your plan and its participants. (More on this below.)

It's important to note that while the investment algorithm is automated, a team of real people — or an investment committee, usually made up of qualified professionals — oversees things at a high level and selects the funds or investment options that a robo-advisor uses in their portfolio selections.  Robo-advisors are also regulated by the Securities and Exchange Commission (SEC).

Second, why should your company use a robo-advisor?

(Hint: It can be low cost and well diversified.)

There are a few reasons why a robo-advisor could be a good choice for your company.

Costs

Various fees are associated with setting up a 401(k) plan. Participants may pay an investment management fee for their 401(k), which typically can be a fraction of their account balance. If the fee is high, it can take a significant bite from their investment returns.

For example, if an account fee is charged annually at 1.0%, and there is a balance of $10,000 at the end of the 401(k) plan year, the account fee for that year could be approximately $100.¹ Robo-advisors are generally cheaper to operate than traditional financial advisors, which can mean lower fees and better returns over time, everything else being equal.

Another way to think about fees is that they could drag down total returns. The industry-average 401(k) management fee is 1.6%,² which may include the annual expense ratios for the funds in the portfolio, in addition to other fees like annual management or account fees. If your portfolio returned 7% on average and you had a 1.6% annual account fee, your actual annual return could be closer to 5.4%¹ — When combined with our 0.15% account fee and an average expense ratio under 0.07% Guideline’s managed portfolios can be under 0.22% for plan participants dependent on the plan tier chosen.³

Employers may also pay a fee to offer a 401(k) plan, which could be a flat administrative fee plus the cost per active participant. Robo-advised retirement plans can cost less overall, which could lower these fees. Typical recordkeeping fees for employers with 100 participants is $165 on average per participant; for 50 participants, it is $231, according to the 401k Averages Book. Guideline's employer fees start at $39 per month plus $4 per participant. (Learn more about our pricing.)

The impact of diversification

Another benefit of robo-advised 401(k) plans is that they utilize diversified portfolios. With 401(k) investing, diversification means including a wide range of investments — like stocks, bonds, real estate, and cash  — in a portfolio. The investments can be bundled together in what's called a mutual fund. A portfolio might have eight mutual funds, but these funds could capture thousands of individual investments like a stock or a bond, depending on their investment objective, strategy, and portfolio holdings.

The investments in a mutual fund could perform differently on any given day, month, or year due to the volatility of market conditions. Diversification is the practice of spreading the investments around so that a fund's exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of the fund's portfolio over time.⁴

For example, historically, when stocks are up, bonds are generally down, and vice versa. That's why having some of each may be important depending on your investment objective and time horizon. Robo-advisors' data-based approach aims to select the right mix of investments to match different investor risks and objectives. (Learn more about the funds inside Guideline portfolios.)

At Guideline, we created six different managed investment portfolios – from conservative to very aggressive. Each one is diversified and aligns with a range of ages, risk tolerances, and goals so you can select what works for you. Our investment decisions within our managed portfolios are based on four principles:

• Make saving for retirement more simple and accessible.
• Minimize investment fees.
• Diversify broadly across and within the major asset classes for better risk-adjusted returns.
• Avoid market timing by focusing on long-term investing strategies.

Automatic rebalancing

A major part of setting up a 401(k) is selecting a portfolio that meets your goals, age, risk tolerance, and time horizon. Each portfolio — whether professionally managed or custom — has a designated mix of assets based on those preferences. However, as the investments rise and fall with the market, the balance of those assets might shift over time.

Portfolio rebalancing helps account for this shift and keeps your assets aligned with your target allocation and goals. Portfolio rebalancing is the process of selling shares of a particular holding that has done well, and using those funds to buy shares of a holding that has had less success to help maintain the weighting of the assets in an effort to keep them in line with your chosen target investment allocation.

Third, how does this relate to Guideline?

(Hint: Guideline is a robo-advisor for retirement plans.)

As a tech-focused 401(k) provider, Guideline has its own robo-advisor software, designed by our team of investment experts and data scientists, to manage its six model portfolios. These portfolios are designed to match different retirement needs and range from very conservative to very aggressive. (Read more about Guideline's portfolios' investments here.)

After a company sets up a 401(k) plan with Guideline, employees complete a personal questionnaire. Based on their answers, Guideline's algorithm suggests one of our six portfolios. Then, the robo-advisor manages their portfolio to help participants make the most of their savings. Participants also have the option of choosing their own investment selections. When your Guideline portfolio assets no longer align with your selected preferences, your allocations will automatically be rebalanced.

If you’re in the market for a new 401(k), choosing a plan with robo-advised portfolios can give your team access to professionally-managed robo-advised portfolios — and your company can add to its bottom line by not breaking the bank on fees.

And if you are interested in learning more about robo-advisors and how to apply them to all investments, — not just retirement — check out The Little Book of Robo Investing: How to Make Money While You Sleep by Qian Liu, our Chief Data Officer, co-written with Elizabeth MacBride. It can be purchased on Amazon, Target, Walmart, and Barnes & Noble.

Disclosures:

This information is general in nature and is for informational purposes only. It shouldn’t be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. Investing involves risk and investments may lose value. Tax laws and regulations are complex and subject to change. You should consult a qualified financial adviser or tax professional before relying on this information.

¹ The returns presented are hypothetical and do not represent actual performance results of Guideline’s portfolios.  The information provided is for illustrative purposes only and is not intended to constitute investment advice nor an assurance or guarantee of future performance.  

² The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book, with data updated through September 30, 2022, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges.

³ Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.067% of assets under management. When combined with an assumed account fee of 0.15%, the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.22%. Alternative account fee pricing is available ranging from 0.15% to 0.35%. Contact Sales at hello@guideline.com to learn more about exclusive pricing options available in Enterprise tier. This information is provided for illustrative purposes only and the actual total AUM fees will vary based on the portfolio and/or funds selected. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup. The assumed annual account fee applied to assets under management is deducted on a monthly basis. See our Form ADV 2A Brochure for more information regarding fees.

⁴ Diversification does not ensure a profit or guarantee against loss.