When Kevin Busque was starting his own company, his employees kept asking him about having a 401(k) plan, but he wasn’t sure how to begin as the information was overwhelming, he told an audience at the Hearsay Summit in late May. Having built a technology firm, and as an engineer, he said he began “unpacking” how to set up a 401(k) and realized something was very wrong with the current system.
“The whole legacy of 401(k)s has lost the point,” he told ThinkAdvisor. “[The point is] to give participants a successful retirement outcome, so how do you do that when you [charge fees] and take away compounded income and interest … it doesn’t make sense.”
He decided to break it down, use his engineering background and build a low-cost 401(k) program. And once he built it, he decided to launch it as a new firm, Guideline.com, that would offer these low-cost 401(k)s to small-business owners. After 18 months, Guideline has roughly 4,000 clients, with about $500 million in assets under management, although, as he points out, that’s not a measurement they use.
“We don’t measure AUM, “ he said. “We don’t monetize it. We’re about growing wealth.”
A new feature coming this summer will bring investment advisors into the process. Because the firm cuts out the middlemen in many cases, “that doesn’t mean that we’re trying to cut out people in the ecosystem [like] advisors who add a ton of value, as they bring reassurance, help and manage small-business owner personal wealth, and can answer employee 401(k) questions,” he says.
He says they leave it up to the advisor on what to charge separately. “Our product stays exactly the same, except we give advisor access to the plan and participants so they can help them individually. We don’t help with individual investment advice.”
Guideline charges new clients (employers) a $500 startup fee, and then $8 per employee per month. Employees aren’t charged anything, except what expense ratio would be on a fund, which he says is about 6 basis points a year, far below the industry average.
They are able to do this, he said, through some technology, but other factors are involved.
“How we reduce our costs is we cut out the middlemen that are non-value added, so things like [third-party administrators],” he says. “We are our own recordkeeper, so everyone else in the industry except for the very large players pay a third party [to do that]. Because we don’t have to do that, we can keep our costs really low, and it allows us to bring 401(k) access to small businesses that couldn’t get one before.”
Guideline has a solution called full stack, meaning they automate plan administration, compliance testing, reporting and disclosures and investment management, and they integrate with some of the most popular payroll providers including BambooHR and ADP. Busque says his first hire was a compliance person, and today they are a 3(38) and 3(16) fiduciary as well as an ASPPA-certified recordkeeper and plan administrator.
There is an 85% participation rate for the program, which has model portfolios determined by an internal investment committee (“Not me, I’m an engineer,” Busque says) that are essentially the equivalent of target date funds, but that auto-adjust as the participant gets older or adds dependents, Busque says. Their custodian bank is State Street. “We don’t touch the money, but we direct how it is invested.”
He adds that because their recordkeeping is modern and scalable, “there no theoretical compute limit to our platform,” which is good as they are growing by $30 million in new assets a month. “But there is a focus limit though, and that 1 to 1,000 [participants per plan].” He explains that firms with more than 1,000 employees typically have their own 401(k) committees and “super-long” sales cycle, whereas Guideline has inbound sales only: “We don’t go whale hunting.”
Father of 401(k)s
Reducing 401(k) fees is exactly what Ted Benna, often called the father of 401(k)s, discussed a couple of weeks ago at the Envestnet Summit in New Orleans. Benna, who helped build the now multitrillion-dollar industry, believes changes need to be made, and he likes what Guideline is doing, he tells ThinkAdvisor. That said, 401(k) plan pricing needs to be “driven down” overall and “it has gotten [more] complex than it needs to be. There are a half-million 401(k) plans, and each advisor puts together a portfolio [that's] not original, and repeating it over doesn’t make sense.”
He also believes there should be auto-enrollment and auto-escalation, and would like to see the government require it. And as a strong advocate for making sure people have enough retirement, Benna believes there is too much “leakage” when an employee moves jobs. He believes that 401(k) money should remain as retirement savings, not be allowed to be taken out to pay down debt or be used for other expenses.
Today, Benna has his own firm, 401kBenna LLC, that helps small employees set up employee retirement saving programs/IRAs through pretax payroll deductions that cost four to five basis points (and a $250 fee if they want Benna’s team to help). He provides a book, “Set Up Your Own 401(k) and Save a Lot of Money,” as part of the education.
The Benna plan provides small businesses yet another alternative, and although many advisors may live on fees through 401(k) advising, many can help clients by providing solutions to small-business headaches.
— Check out ‘Father of 401(k)s’ Says Big Changes Are Needed on ThinkAdvisor.