Serving Small Businesses with Starter K: with Guideline’s Jeff Rosenberger and Jeremy ‘Cabs’ Caballero
Jeremy Caballero and Jeff Rosenberger, Co-founder CPO and COO, Guideline
There’s always something new in the retirement space – which for us lives at the fascinating intersection of tax law, legislation, technology, and innovative thinking. We’re excited to be here today with both the Cofounder and Chief Product Officers and the Chief Operating Officer for Guideline – Jeremy ‘Call me Cabs’ Caballero and Jeff Rosenberger talking about what’s new in fintech – and how they view the emerging Starter 401(k) space.
Jeff, tell us a little about what the Guideline team have been doing since we last spoke for RSM?
It won’t surprise you to learn we are still very focused on serving small and mid-sized businesses. They play an enormous role in the US economy, employing tens of millions of workers.
Many of us at Guideline come from startups or early stage companies, or have families with small businesses, that never had access to a retirement plan. So we have a lot of energy and passion for creating access and helping businesses get access to a retirement plan for the first time. Of course we take conversions from existing providers too! But about 90% of our business comes from new plans.
If you’ll indulge us, we’ll share a couple of metrics. We’re now overseeing more than $11 billion in assets for more than 46,000 retirement plans and their participants. That’s about four times the number of clients since our 2020 conversation, and we’ve doubled our team from about 180 to about 370 employees.
Our plans use low-cost Vanguard funds, and we serve as the investment advisor, plan administrator and recordkeeper – keeping track of where all the assets are held at any given point in time, and making participant data available through our system.
I looked back at when we launched in 2016, there were a little over 500,000 401(k) plans then. Today there are 720,000 or so. It’s still not nearly enough, but around 200,000 plans were created during that time period. We've created about 20% of them, or 40,000 new plans. We're really proud of that.
That must make you one of the fastest growing new plan providers in the country. What’s working?
I think there was an element of good timing at the point when we got started. We also bring more of a software mindset to this space, versus a more traditional asset management mindset. Internally, we look more like a SaaS (software as a service) business than an asset manager. That’s put us in a position to be very focused on the small and mid-sized business clients.
We charge a fixed monthly fee and a per account fee to the plan sponsor, along with a low asset-based fee of 15 basis points to the plan participants. We do focus on being in a position to charge the employer for sponsoring the plan. There are a couple of nice things about that. One, it’s typically how they pay for payroll services, with which we are usually integrating into, so they already pay for services that way.
Two, tax credits from SECURE and SECURE 2.0 only apply to administrative fees borne by the employer as sponsor, not on fees that are paid by participants, like asset-based fees. It works to line up in a way that small businesses can maximize their tax credits.
We think we’ve done a good job of integrating and partnering with some of the leading cloud-based payroll companies. We were fortunate that in 2016 Gusto (then ZenPayroll) was looking for a 401(k) partner. We co-developed a tight integration. At the time they had 30,000 payroll clients; now they have over 300,000. They’re still our single biggest partner, but we also have strong partnerships with Intuit, Ripping, Square, Zenefits, and many others.
Cabs, your background is not retirement services – tell us how that influences your product design approach.
You’re right – my background is very much not in finance. My expertise is studying people and how they interact with computers. That’s a different perspective than you might get from the classical finance and investments person. For me, it amplified some of the user experience problems I saw.
In fact, I’ll share this. Early in my career I was invited to a 401(k) by my employer. I quickly became inundated with asset allocation language, and funds of all sorts. I was almost ashamed to tap the shoulder of the person next to me to admit and ask – I’m feeling a bit uncomfortable, how do I approach this? In that way, it’s personal. I also know full well that people around me don’t always feel as savvy as they’d like to.
To me as a product designer, I see that as a challenge. How can I build something using the constructs that already exist in finance that helps people navigate and feel confident in their decisions.
I’ll add that we’re always trying to stay at the bleeding edge of innovation around access and use. When we began this work we looked closely at existing constraints – legal and technical – to determine how to build a 401(k) a small business could afford. In terms of administrative burden, you can make it as simplified as possible. And you build a platform through which the smaller businesses with zero to little assets could feel invited and welcomed.
Over the last few years we’ve seen many states pass and roll out Auto IRA programs, including in your home state CalSavers. Jeff, how does this impact your business?
You know we’ve been supportive of the state programs from the beginning. And we saw a really huge lift in California connected to the CalSavers deadline in the first half of 2022 for employers with 5 to 50 employees. We like that in the language the state Treasurers and program directors pretty consistently use language that emphasizes, “Let’s increase access – and that can come in the form of a state Auto IRA program, and from the private market. Let’s just do the right thing to get the right product to the right peoples’ hands.” That’s really important.
We like some of the recent developments, such as Colorado and Maine starting to partner up (and Delaware, announced this week). That makes a lot of sense. We also like the potential for a federal standard that will set a baseline expectation for what small businesses should be doing and how they can either use an Auto IRA hosted by one of the states, or they can go in the private market and get a 401(k) from someone like Guideline.
Let’s talk about the new stuff. What have you been building this year, Cabs?
Yeah – so we’ve got a lot going on! Over the past year we built a mobile app available both on Apple and Android formats. We did this because we’ve known for a while that many of our client’s employees don’t have formal workstations with desktop computers. Many of them are out in the field, working in restaurants, in dentist’s offices, and other on-the-move occupations. We want to give them an equivalent signup and account management opportunity and experience. And we find those who onboard, view and manage their 401(k)s online tend to save more toward retirement. So you get a double whammy.
We’ve also watched how new types of 401(k) plan designs work for employers. QACA – qualified automatic contribution arrangements – are one example. They allow for the use of auto-escalation, and work well for employers as they start to graduate from the simplest plans toward a mid-market plan. For these employers having QACA available has been integral for us. And now we are expanding in the other direction to include a Starter 401(k).
Starter 401(k)? Tell us more.
Around this time last year SECURE 2.0 passed with the Starter 401(k) component in it. We already had our 2023 tech roadmap built out, but we set aside some things to build out a compliant offering.
Our customers are small businesses. If the boundaries for what’s possible for them change where we can offer a 401(k) plan that’s cheaper, easier to administer, and has a lower compliance burden, we’re going to take that opportunity. We also wanted to be at the forefront, leading the design for what a Starter 401(k) should look like.
We’ve been in market since October, so only a few months. In that time, about 15% of our new signups have been for the Starter 401(k). We are seeing a lot more in certain industries – like construction, entertainment, healthcare, and restaurants – about who we thought the buyers might be. You’re seeing someone who was apprehensive about buying a 401(k) deciding the Starter K is something they can manage.
How do you see Starter K and Auto IRA fitting together – are they compatible, or competitive, Jeff?
I believe heavily in building and developing awareness and getting the word out on retirement savings and access. Together we are, with the state programs and new federal norms like automatic enrollment through the SECURE Act, making good progress and creating a moment for awareness and better savings levels.
I would point out that if there are 720,000 401(k) plans and about 6 million employers in the US, then at the employer level only about 12% actually offer a 401(k) plan. We think we see a set of stepping stones from no workplace retirement savings to very robust retirement offerings.
That can be a state Auto IRA program if the employer is not in a position to cover administrative costs. It could be a Starter K if they are in a position to cover some administrative costs, but not in a position to do an employer match or deal with non-discrimination testing. It could also be a full 401(k) plan – beginning with a Safe Harbor plan with a 3% or 4% match.
Jeff, lots of movement in the last few years. Where do you see us going from here?
For one thing, we’re anticipating a fair bit that a lot of small businesses will sign up for the Starter 401(k) and look to upgrade over time as their business matures.
To us, it’s a combined opportunity to get a lot more growth in the industry where we are looking at 1-2 million retirement plans alongside the state Auto IRA programs.
Circling back, we really like the idea of a federal minimum standard, if you will, that clarifies “here's an expectation of what an employer should offer”. The details of that obviously would need to be worked out. Your readers will recall there was a draft version of a federal standard in the Build Back Better Act.
That’s just setting the expectation for employers that they should be offering a retirement benefit and then giving them some room to pick what is best for them, whether it's an Auto IRA, a Starter 401(k), or more of a full blown 401(k) plan.
We like auto escalation and would like to see more of it. For the most part people participate pretty well into their retirement plan once they decide to contribute. But there’s still good energy to be spent on efficient ways to make sure they’re contributing up to their full employer match if they’re in a position to do so, and at higher levels over time as they can. There are a few different ways providers can build that out, and we’re excited about improving the experience there too.
Cabs and Jeff – kudos to you for your user-focused approach, and thank you for sharing your insights and innovation.
You can connect with Cabs and Jeff and follow the work of Guideline here.
Jeremy ‘Cabs’ Caballero is the co-founding Chief Product Officer for Guideline. Cabs’ background as Lead Product Designer and Head of User Experience includes companies from diverse spaces, such as TaskRabbit, TargetSafety, and Targa Trophy. He describes himself simply: Helping small business owners and their employees save for today and tomorrow. 15 years building startups. Obsessed with design. Champion of simplicity. Dad.
Jeff Rosenberger is the Chief Operating Officer at Guideline. Jeff has worked in fintech for almost two decades focused on asset management and lending, including as an early executive at Wealthfront where he helped build the market for direct-to-consumer robo advice. Jeff earned a PhD in Management Science & Engineering from Stanford, a BS in Statistics from UC Berkeley, and he holds the FINRA Series 65. Now that we know this, we are going to start calling him Dr. Jeff.
This piece was also featured in the December 14, 2023, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
