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This year, three Internet-based companies joined the retirement plan services industry – Honest Dollar, ForUsAll and Captain401. These startups are noteworthy because they weren’t founded by career retirement plan professionals. Instead, they were founded by Silicon Valley entrepreneurs backed by Venture Capital (VC) investors.
Underpinning these startups is a belief technology can solve a key problem for most small business retirement plans – high fees. Since their launch, these companies have received a good bit of attention by the media, including articles in the New York Times, Wall Street Journal. I’ve been pretty disappointed by their coverage. Each company has significant shortcoming(s) the media has failed to mention. I think it’s time to set the record straight.
Without question, there’s a problem
The small business 401(k) plan market has been exploited by the financial services industry for decades. With little to no plan assets, small businesses have been stuck with plans that invest participants in high-priced annuity products that charge onerous surrender charges upon service termination. While low cost 401(k) providers like Employee Fiduciary exist today, high-priced brand name providers still rule the small business 401(k) market.
An exploited market is one that’s primed for disruption. That is why VC investors are banking on the success of these startups. I get it. We’ve been successful offering a low cost alternative to high priced retirement plans for years.
ForUsAll
ForUsAll does not offer stand-alone 401k plans. Instead, they offer an “open” Multiple Employer Plan (MEP). An open MEP is a group of unrelated employer 401k plans commingled inside a single trust account. Open MEPs are pretty uncommon these days – and for good reason, in my opinion. Since hundreds of unrelated employers can participate in a MEP, their recordkeeping is significantly more complex vs. stand-alone 401k plans. MEPs are also subject to additional ERISA requirements, like the “one bad apple” rule, which can disqualify an entire MEP if a single employer has a qualification failure.
To offset its increased complexity, a MEP should offer lower expenses or investments not otherwise available to small 401(k) plans. However, in the case of the ForUsAll MEP, that doesn’t happen. The plan charges high per head and asset-based fees vs. its low cost competition - $94/month + $5/month for each employee in excess of 10 + a 0.40% fee based on plan assets - and uses the same Vanguard index funds available to stand-alone 401k plans.
Issues
- A MEP with index funds? With no investment return advantage, there is no offsetting benefit for increased MEP complexity and disqualification exposure.
- High per head and asset-based fees vs. low cost 401(k) competition.
- What is the 401(k) administration experience of this company? None is listed on their leadership team page. A MEP plan design makes 401(k) expertise particularly important.
Honest Dollar
Honest Dollar does not offer 401(k) plans. Instead, they offer payroll deduction IRA products (Roth, traditional, SEP and SIMPLE IRAs). According to their website, Honest Dollar charges $10/month per employee. Participants can invest their account based on one of six Vanguard-designed ETF portfolios.
Issues
- Contributions are subject to lower IRA limits each year
- If an employer has over 10 participants, a 401(k) plan can be cheaper
- If an employer wants an IRA product with Vanguard funds, they get one directly from Vanguard. Participants could get the same investment advice from Vanguard they could get from Honest Dollar
Captain401
I know the least about Captain401. I read a TechCrunch article about them last week. Like ForUsAll, the company’s leadership team appears to have no 401(k) experience. Unless you count the CEO’s experience helping “more than a 100 friends and family look at their 401(k)s and help with their investments.” According to their website, Captain401 charges $90 (plus $4/employee) per month. Their Form ADV says a fee up to 0.50% annually may be charged for “investment advisory and pension services.”
What bugs me most about Captain401 is their assertion, “It takes companies 10 minutes to set up their plan, we automate the ongoing administration.” That’s nonsense. What about plan design? There is no such thing as a one size, fits all 401(k) plan. Proper plan design is important – it can save employers thousands of dollars in contribution expenses each year. As an example, see the last 3 pages of this plan design study. Exhibit #1 would cost the company $55k less to maximize owner contributions (based on 2013 limits) than Exhibit #3. When does plan design happen during a 10 minute setup process?
Issues
- Lack of consultative plan design during the 10 minute onboarding process could cost an employer tens of thousands of dollars in contribution expenses annually.
- What is the 401(k) administration experience of this company?
- What is the full cost of the service? Website and Form ADV do not agree.
We’re talking some big money here!
ForUsAll received $3.3M in seed money from VC capital investors. Honest Dollar received $3M. I don’t know how much Y Combinator is backing Captain401. Each has a lot of selling to do to repay their funding. According to their latest Form ADVs, ForUsAll has only $700,000 in assets under management (AUM), while Honest Dollar and Captain401 have $0 in AUM.
I’m glad to see the small retirement plan market getting more low cost competition – it’s overdue. Too many small businesses think they need to settle for high-priced plans from brand name institutions. I think more competition will raise employer awareness of low cost alternatives.
That said, I wish the media coverage of these upstarts was more balanced. They have been touted as innovators - they’re not – they’re simply the latest companies to join a low cost retirement plan movement, which to this point, hasn’t received a lot of attention. Each service has significant shortcomings that warrant serious consideration by a retirement plan fiduciary.
