Quick takeaways
Robo-advisors provide software-based management tools for investing.
Portfolios managed with a robo-advisor generally tend to be less expensive to use than human-advised portfolios.
Robo-advisors intend to keep portfolios optimally diversified, which could lead to better returns over time for plan participants.
Gusto Investment Services, LLC offers six retirement portfolios that are managed under a robo-advisor model.
There can be many benefits to offering a 401(k) plan — 73% of employers say offering a 401(k) has positively impacted their ability to retain talent.¹ 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.
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 $100.² 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 1.21%,³ 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 1.21% annual account fee, your actual annual return could be closer to 5.79%.² When combined with our 0.25% account fee and blended expense ratios ranging from .058% to .061%, Gusto Investment Services, LLC’s managed portfolios can be under 0.31% for plan participants dependent on the plan tier chosen.⁴
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. (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.⁵
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 Gusto Investment Services, LLC’s portfolios.)
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 a Gusto 401(k)?
(Hint: Gusto Investment Services, LLC is a robo-advisor for retirement plans.)
As a tech-focused 401(k) provider, Gusto Investment Services, LLC has its own robo-advisor software, designed by its 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 Gusto Investment Services’ portfolios' investments here.)
After a company sets up a 401(k) plan with Gusto Retirement, employees complete a personal questionnaire. Based on their answers, Gusto Investment Servcies’ algorithm suggests one of our six portfolios. Then, the robo-advisor helps manage the portfolio’s allocation and drift to help keep their savings on track. Participants also have the option of choosing their own investment selections. When your Gusto Investment Services’ 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.
FAQs
What is a robo-advisor in the context of a 401(k)?
A robo-advisor is software that automates investment portfolio management based on a participant's age, retirement goals, and risk tolerance. It replaces manual portfolio selection with an algorithm that suggests and maintains a personalized investment mix, without requiring the participant to have investing expertise.
How does a robo-advisor decide which investments to pick?
When employees join a robo-advised plan, they complete a short questionnaire about their age, expected retirement date, and risk tolerance. The algorithm then recommends a portfolio from a set of pre-built options — typically ranging from conservative to aggressive — and keeps it aligned with their goals through automatic rebalancing.
Are robo-advised 401(k) plans less expensive than traditional ones?
Generally, yes. Because robo-advisors automate what human portfolio managers once did, they can cost less to operate. The industry-average 401(k) management fee is 1.21%.3 Robo-advised plans can bring total fees significantly lower, which directly improves long-term investment returns for participants.
What is portfolio rebalancing and why does it matter?
Over time, market movements cause a portfolio's asset mix to drift from its target. Rebalancing is the process of selling shares of assets that have grown beyond their target weight and buying more of those that have shrunk — keeping the portfolio aligned with your original risk and return goals. Robo-advisors handle this automatically.
How does diversification work in a 401(k)?
Diversification means spreading investments across different asset types — like stocks, bonds, and real estate — so that poor performance in one area doesn't tank the whole portfolio. In a robo-advised 401(k), each managed portfolio holds multiple mutual funds that collectively represent thousands of individual securities, reducing the impact of any single investment's volatility.
Disclosures
1 Gusto Retirement (formerly Guideline) research run with Suzy. Insights based on data collected Dec 2023–Jan 2024 from a survey of 776 US-based respondents. Guideline was not identified as the survey sponsor. The experience of the respondents in this survey may not be representative of all people.
² These are hypothetical examples for illustrative purposes only and do not represent any current or past client accounts.
³ The average investment expense of plan assets for 401(k) plans with 10 participants and $100,000 in assets is 1.21% of assets, according to the 26th Edition of the 401k Averages Book, with data updated through September 30, 2025, 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.
⁴ Not investment advice. Gusto Investment Services’ managed portfolios have blended expense ratios ranging from .058% to .061% of assets under management. When combined with an assumed account fee of .25% charged by Gusto Investment Services, LLC, estimated total AUM fees for one of the managed portfolios can be under 0.31%. See Form ADV 2A Brochure for fee info. Expense ratios subject to change by and paid to the fund(s). View full fund lineup here.
⁵ Diversification and asset allocation do not ensure a profit or guarantee against loss. Investment advisory services for Gusto's 401(k) product (when 3(38) fiduciary services are appointed) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. For more information see the ADV 2A Brochure. Investing involves risk and investments may lose value, including loss of principal. View full fund lineup.
