401(k) startups find tailwind during the pandemic

Guideline, Human Interest target small and medium-sized businesses

Amid consumers’ rush to set aside a bigger chunk of their incomes during the pandemic, technology startups that help small employers offer 401(k) plans are experiencing growth.

Small businesses that offer 401(k)s can be hamstrung by high administration fees  — often up to 2% — making them inaccessible to those who need them most. In recent years, fintech startups have sought to reach those clients with lower fees and easy customer experiences driven by technology.

Two startups in this field – Guideline and Human Interest – have added clients at a rapid clip in recent months.

San Mateo, Calif.-based Guideline, which has $2.9 billion in assets under management, said it has grown its account numbers by 65% year over year, with 14,500 plans. Meanwhile, Human Interest, which is based in San Francisco and has around 3,000 clients, said it expects to cross $1 billion in assets in the fourth quarter. It’s adding hundreds of new plans a month.

Entrepreneurs say the growth among fintechs offering small business 401(k)s is driven by two trends: a push for sustainable benefits beyond in-office perks in a context where employees are working remotely; and a shift from legacy 401(k) providers as some employers cut costs.

“What we’re seeing a lot of right now is just continued acceleration and growth in businesses adding 401(k)s — meaningful benefits to their employees and getting away from what I would call like the non-material benefits, like offering food at the office,” Kevin Busque, CEO of Guideline, told FinLedger. “You look at Guideline at $8 per participant per month —  that’s cheaper than offering coffee to employees.”

While some companies trimmed their employee numbers during the pandemic, this was offset  by the growth of new clients, he added.

Fee structure

401(k) startups geared at small businesses tout transparent, service-based fees. Guideline, for example, charges clients a monthly base fee that ranges between $39 and $89 and a monthly fee per employee of $8. Meanwhile, Human Interest levies monthly base fees ranging from $120 to $150, and per-employee fees that range between $4 and $8, depending on the type of plan. In addition, Human Interest charges employees on its clients’ plans a 0.5% fee per year.

Jeff Schneble, CEO of Human Interest, said a notable shift he observed during the pandemic was clients moving away from traditional 401(k) providers, in contrast to its historically dominant client base of companies offering 401(k)s for the first time. 401(k) first-timers typically made up 80 to 85% of Human Interest’s customer base, but attrition from incumbents changed that dynamic in recent months.

“We’ve just seen that kind of conversion demand really spike, and last month half of our new customers were those conversions from legacy 401(k)s,” he told FinLedger. 

Funding boom

Both Human Interest and Guideline closed significant funding rounds in recent months, signaling continued investor confidence in the model. In July, Guideline raised $85 million in Series D funding, co-led by Al Gore’s Generation Investment Management and Greyhound Capital. The company has now raised $144 million in total. Human Interest has raised $81.7 million in total since its 2015 inception. The startup announced a $40 million Series C in March, and then a $10 million extension in May that was “fueled by customer demand.”  

One Guideline investor who spoke with FinLedger believes the small-business 401(k) field is ripe for continued expansion, especially given multiplying demand for low-cost, tech-enabled solutions.

“[The market] is hugely underserved, and it’s hugely inefficient; the big providers are not full-step, vertically integrated players like Guideline is,” said Ryan Gilbert, a partner at Propel Venture Partners. “The third point is a significant opportunity to cross-sell products and services related to the goal.”

Indeed, if startup 401(k) providers can crack the code on customer acquisition, they will be in a better position to introduce new offerings to a loyal customer base.

The future 

Both companies pointed to strategies to expand the pool of offerings for clients. Guideline last year rolled out an IRA product for terminated and dismissed employees; it’s looking to expand into SEP-IRAs in the near future. The company also launched offerings for advisers and accountants in recent years.

One evolving development that may affect product roadmaps is how a possible change of U.S. administration might modify aspects of 401(k) governance. Details on a possible Joe Biden 401(k) plan aren’t entirely clear, though recent reporting suggests possibilities for a kind of “automatic 401(k),” including for those who lack access to a pension or employer-sponsored plan.

Another Biden plan proposal is to change the incentive system by ending upfront deductions and replacing them with flat tax credits for each dollar saved. The thinking is that it would lower the playing field for lower-income earners: “Someone earning $600,000 would get the same tax break as someone making $60,000,” a recent analysis suggested.

While there is support for more opportunities for consumers to auto-enroll, thereby offering more incentives for lower-income earners to save for retirement, industry practitioners offered mixed views on the impact of a proposed flat tax credit that would replace upfront deductions, particularly for higher earners.

“Ending upfront tax credits would negatively impact incentives to save for retirement,” said Guideline’s Busque. “It wouldn’t impact our space in the near term, but if it does pass, it will be more important than ever for plan sponsors to understand the fee structure of their plan given the decreased incentive to put more money in.”

Meanwhile, Schneble noted that the objective of a flat tax credit would be to bring in lower-income earners into the retirement savings tent.

“I don’t know that this is so much about taking away the benefit from people  — the higher earners —  but I think adding more incentives for lower earners is good for the industry,” he said.

Others say the effect of a possible Biden 401(k) on startups will depend on implementation, especially since it is not yet clear whether the government will simply offer an account to those who do not have one now (like the Obama-era MyRA program that was shut down in 2017), or if it will be delivered through some form of public-private partnership. 

“It should increase the incentive for lower-income people to save because they are getting a match from the government, and higher-income brackets will not benefit as much by the tax code but will still get a credit,” suggested wealth management analyst and consultant Jasmin Sethi. “Whether these funds will be invested with startups or more established companies, or even in some sort of automatic government account, is still to be determined.”

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