Small Business and New Plan Formation – Really?

“From the beginning, the co-founders were very much of the mindset of starting with a “clean sheet of paper”. How would you design a great 401(k) plan for small businesses today?

We hear all the time that small business owners don’t establish plans because it’s complicated, or costly, or just a pain in the neck they plan to get to later - because we know they care about their workers. They tell us, and they show it in lots of ways. So what does it look like when small businesses DO establish plans? We get an inside peek from Jeff Rosenberger, COO of Guideline. Keep an eye out for hints and tips sprinkled throughout this piece.

Jeff, we’d love to have you tell us just a little bit about yourself and Guideline

Thank you for having me. I'm the Chief Operating Officer at Guideline where I’ve been for the last four years. The cofounders, Kevin Busque, Mike Nelson and Jeremy Caballero, started Guideline in 2015 and brought our 401(k) product to market in 2016.  Personally, I’ve spent the last decade in fintech working with large financial institutions, then in consumer products, and now at Guideline.

Our co-founders started Guideline based on their experience at a prior startup, TaskRabbit, where they struggled to get a high quality 401(k). At TaskRabbit, Kevin set up their payroll and 401(k) plan and based on the challenges he faced he started thinking about how to build a better small business 401(k) solution and a company to do it. 

Fast forward to today we have over 13,000 401(k) clients in all 50 states and a team of 180 across three offices in San Mateo, CA, Portland, ME, and Austin, TX.  We are focused on serving small and mid-sized businesses where the access issues are most acute.  Over 85% of our clients started a new 401(k) plan with us versus converting over from an existing provider.

Awesome. Tell us a little bit about the defining characteristics of your product offering – what were Kevin and the cofounders looking for?

It's very much a software solution and the cofounders all have tech backgrounds vs. coming from financial services.  For example, we enable our clients to set up a 401(k) plan without talking to anybody if they use one of our integrated payroll partners.  That said, most of our clients do want to talk with someone at least briefly about plan design, but they can go through the plan setup process entirely on their own in 10-15 minutes.

You’ve mentioned pricing to us – what’s different there?

We don't charge fees based on assets under management, and as far as I know we are the only 401(k) provider that doesn’t.

We are technically an investment manager because we are registered with the SEC and we manage $2.5B, but the business model is very much a software services model. We charge a $39 or $99 monthly fee along with an $8 monthly per participant fee for each participating employee. The plan sponsor, the small business, pays those fees and they only pay for the employees that participate.

The participants just pay the underlying costs of the Vanguard index funds and standard transaction fees if they need to withdraw or take a loan.

Got it! Now, we met through the greater retirement security community which is focused on a range of public and private solutions. Tell us a little bit about Guideline's interest in that space.

We are always interested in understanding the different industry and policy perspectives. You never know where the next idea will come from so it is good to hear a variety of perspectives.  I would also highlight that we are regulated by the SEC and subject to ERISA and the tax code. So compliance is woven into our fabric and we have attorneys in several functions beyond our Legal and Compliance team.  

In fact, the first hires the cofounders made in 2015 were our Chief Compliance Officer, our Head of Retirement Consulting who is also a JD and CFP, and an engineer to help Mike build out our recordkeeper.

When I joined Kevin said we could hire as many lawyers as needed across the organization but he was going to put a hard cap at three MBAs no matter how big we got.  Maybe he was joking but I’m pretty sure we only have three MBAs in the company today! Lol.

One of the models that gets talked about are the state facilitated retirement savings programs. Have you looked at those models and what's your view?

I have had the opportunity to meet lots of the key folks involved, including Treasurer Torsella from Pennsylvania who you interviewed previously and I’ve gotten to know Katie Selenski from CalSavers pretty well here in California.  We've been supportive of the programs from the beginning when we first heard about OregonSaves and the work you helped kickstart there. 

We recognize the size of the retirement savings problem and that we need to come at it from a couple of different angles. Our 401(k) solution is not going to solve all of the coverage gap challenges, so there'll need to be other pieces to the puzzle, like the state programs and other products we plan to develop over time. 

To be clear, the state auto IRA programs, especially those with employer mandates, helps us.  As a venture-backed startup, we are competing against other providers to some degree, but we are mostly competing against non-consumption and whether we can achieve scale relatively quickly. 

Having the state programs and all the momentum there forces small business owners to make some decisions. So we see that as a good thing, for the US workforce, society as a whole, and as a catalyst for our business as well.

The state programs are using automatic features which are also emerging best practices for the private sector – what are your thoughts on top features of a good retirement plan or program?

We absolutely agree. A lot of this came out of the Pension Protection Act of 2006 – offering a safe harbor for auto features. From the beginning, the co-founders were very much of the mindset of starting with a “clean sheet of paper”. How would you design a great 401(k) plan for small businesses today? 

Auto-enrollment was near the top of the list. And you've seen the stats which highlight that younger workers and lower wage workers really benefit from auto-enrollment. Otherwise those folks are less likely to engage and enroll. We are fortunate to have two great behavioral economists as advisors, Adam Grant and Brigitte Madrian, and Brigitte did a lot of the seminal research on auto features. 

Because all our plans have auto enrollment, we see participation around 85% across our plans. Turns out, inertia is a tremendously powerful force.

That’s interesting – what else impacted the design of your 401(k) product?

Another important development was the advent of the direct-to-consumer robo-advisors like Betterment and Wealthfront.  Personal Capital is also in that space and was recently acquired by Empower for $1B. Our Chief Data Officer, Qian Liu, and I were fortunate to be part of the early team at Wealthfront that pioneered automated investment advice a decade ago. 

The approach uses a suitability questionnaire to help investors get a handle on their risk profile; this helps you get them into an appropriate portfolio and provide a level of embedded investment advice. This also enabled us to develop our own managed portfolios that have even lower costs than the target date funds from Vanguard. We use Vanguard’s Admiral share class index funds to build managed portfolios of varying levels of stocks and bonds. The overall effect is we can offer a diversified portfolio for 6.4-7.0 bps, which translates to $6.40-$7.00 for every $10,000 invested.

So this is a little different than a target date fund in one other way - it sounds like something that is not strictly age-based

That's right. If the participant does not engage in our suitability questionnaire, we will default to their age and the years until retirement.  But if they do engage and demonstrate that they are either more or less comfortable with investment risk, we can tune their stock and bond mix, up or down a little bit. 

That sounds like a risk informed portfolio, with target retirement dates as the underlying concept

Yes. And over 90% of our participants go with one of our six managed portfolios.

We’ve talked about a couple of top features, auto-enrollment, and the ability to engage with people and help them select something that is a step more personal perhaps than a straight target date fund. What else, Jeff?

I would underscore that we view the 401(k) plan as an employer sponsored benefit. We think the employer should cover the cost of that benefit and we try to make it reasonable for them to do that. 

With the recent passage of the SECURE Act, employers get even more tax incentives and tax credits specifically for starting new plans and offsetting admin fees but not AUM fees to participants. This includes an additional $500 incentive that can be claimed for new plans that use auto enrollment. With this in mind we recently published a tax calculator on our site for small business owners.

We hear that employers hesitate to start plans because it's complicated. They're not sure where to go. You know, it's not something you do every day. What do you think is important to making it easy?

We think being available in the leading cloud-based payroll platforms is key and we have a very consultative sales team that focuses a lot on helping plan sponsors with plan design. We've iterated on our plan set up process within the product to really help inform plan sponsors about the key elements as they go. Do they want to offer an employer match? If so, should they consider a Safe Harbor match? Things like that.

Would you say most of your employers are working with payroll providers and that also helps to streamline early engagement?

Definitely. Over 90% of our clients are with our integrated, cloud-based payroll partners.  Our very first payroll partner was Gusto who we partnered with in 2016. They're a sizable and rapidly growing payroll company and they've been really great to work with. We now have a number of other integrated payroll partners including Intuit, OnPay, Rippling, Square and Zenefits. 

Payroll is a natural place to think about benefits. If you're a small business owner, once you start employing people, you need to think about payroll, PTO, worker’s comp, health insurance and retirement. So it's a pretty natural place to go looking for benefits. We think being available there and integrated into the experience is critical.

Let’s talk MEPs and PEPs - Is there anything about them that makes them easier or better for you or the customer base you are serving?

We wouldn't rule out using a PEP structure in the future, but I would say it's a case where the technology may have moved faster than the policy making. For the most part, changing to a PEP wouldn’t unlock any meaningful advantages for us or our clients. We've been able to do what a PEP is intended to do by using technology. 

PEPs may make sense for larger providers who are thinking about how to serve smaller plans. But for us, it doesn't really add to what we're doing. We will keep an open mind and see how it plays out, but we're not diving into it.

Interesting perspective. What haven’t we asked you?

Yeah, what’s next? 

We just raised another round of venture capital and announced it yesterday on our blog and with Forbes. We are really excited to add Generation Investment Management, which is Al Gore's investment firm, and Greyhound Capital as new partners.

This will enable us to serve our participants even better over time. For example, for participants that part ways with their employers we have developed a Rollover IRA product that we're really excited about. It's early days, but we have good momentum.  We are interested in a SEP IRA as well for some of the smallest businesses, where 401(k) may still be a bit out of reach. 

And of course, we really like the state Auto IRA programs and would consider serving as a partner for these programs now that we have our IRA product in the market. So we are keeping a close eye on developments there, and we're excited about all the progress.

Awesome, Jeff, thank you for sharing your insights and approach with us today. Interested in more? You can learn more about Guideline at www.guideline.com or follow Guideline on Twitter @Guideline401k or Jeff @RosenbergerJeff.

This piece was featured in July 29, 2020 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.