More than half of the 55 million Americans who are not offered a retirement plan through their employers work for small businesses. While some see this longstanding coverage gap among small firms as an unsolvable problem, others see a market opportunity. This is the second blog post in a series that will feature perspectives from entrepreneurs and intra-preneurs in both the for-profit and non-profit sectors who are using technology and other innovations to reach this hard-to-serve population. We hope that the resulting insights will help other market players and federal and state policymakers better understand what it will take to achieve a truly universal retirement savings system in the US.
Jeff Rosenberger is the Chief Operating Officer of Guideline, a new 401(k) provider focused on the small business market. The Aspen Financial Security Program asked him a series of questions about his work and the future of retirement in America.
Aspen FSP: What do you see as the biggest reasons why a majority of small business owners don’t offer retirement benefits to their workers?
Jeff Rosenberger: The retirement benefits crisis stems from a massive market failure based upon misaligned incentives. Almost all retirement plan providers today charge assets under management (AUM)-based fees, which means they derive revenue from a percentage of the assets in a company’s 401(k) plan. The AUM in a small business 401(k) plan is typically much less than for large companies, and new 401(k) plans start with no assets at all!
With these incentives in place, the legacy retirement plan providers are ambivalent about small business 401(k) plans and will either refuse to take plans under a certain size or charge them exorbitant fees. Moreover, 401k plans can be quite complex, making the plans difficult to administer for firms without in-house expertise. Most small business owners can’t dedicate the resources required to administer complex plans, nor stomach the high costs. This is in spite of their desire to provide retirement benefits to their workers.
Small business owners should be able to set up a 401(k) plan without becoming an expert and the pricing should be transparent, intuitive, and compelling. And the costs to their employees should be minimal to enable them to build their retirement savings successfully.
What are the most promising ways to overcome these barriers? Is the answer private sector innovation or is there a necessary role for government policy change?
The crisis is too large for a single solution or institution to solve effectively alone. We believe the public and private sectors must both play a role.
While President Trump recently signed a resolution discouraging state-run IRA programs, the two states furthest along (California and Oregon) have pledged to push forward nonetheless. Taken together, the five key states currently developing their programs (California, Connecticut, Illinois, Maryland, and Oregon) will help enroll 15 million workers into a retirement plan over the next three to five years.
These programs, often referred to as Secure Choice, require small businesses either to enroll their workers in the new state auto-IRA programs or go into the private market and find a retirement solution to offer their workers. We see this as a galvanizing event for small business owners. Many will enroll their workers in the Secure Choice plan in their respective states, but many others will pick a private plan that better fits their workers’ needs.
Private innovation is also crucial to reverse the status quo and expand access. The regulatory changes, combined with modern technology, have presented a new cadre of retirement startups with a once-in-a-generation opportunity to rebuild retirement services from the ground up.
How does Guideline attempt to reach this market segment? How is your approach different from what has been tried before?
The majority of our clients are starting brand new 401(k) plans. These are small businesses that previously lacked access or couldn’t afford to offer retirement benefits. Even with thousands of clients across the US, we have only scratched the surface on the savings gap. Since small businesses employ half of the private sector workforce, retirement benefits for small business are not only a big opportunity, but also an important responsibility.
As part of our mission to make retirement affordable, convenient, and easy for all small businesses and their employees, the Guideline platform encompasses every aspect associated with a 401(k). We take care of administration, record-keeping, compliance, reporting, investment management, and education – something that larger providers struggle to deliver to small businesses in an efficient way.
For our pricing, we avoid AUM-based fees and instead charge a subscription fee. Our small business clients pay us a one-time setup fee of $500 and $8 per month for each participating employee. Their participating employees don’t pay us anything and only incur the index fund costs. This model allows us to work with very small businesses that don’t have an existing plan with assets already.
What have you learned about the small business segment in the process?
Through developing our relationships with thousands of small businesses in the last year, we have seen a great deal of grit, optimism, and commitment to others. American small businesses and their employees are really underserved despite being hard-working and playing important roles in our communities. We serve independent schools, small retailers, local blue collar businesses, technology startups, healthcare practices, and professional service firms and all their workers – all of who should have the opportunity to plan for their retirement as if they worked at larger companies.
What is the future of the small business retirement market? How will the market look in five years? Ten years?
We see a future in which the opportunity to retire comfortably becomes universal. This will require much greater access for small business through state auto-IRA programs and 401(k) plans from private sector providers. It will also require employee auto-enrollment becoming the industry standard to continue nudging participation rates up.
Greater access to retirement benefits also means employee savings will be able to grow with much, much less drag from AUM-based fees. As I mentioned above, with our plans, participating employees only pay for the index funds. Today, this is an average of 0.07 percent, or $7 every year for every $10,000 invested in one of our managed portfolios. This is half the cost of comparable target-date funds from Vanguard. And we don’t see any reason that the cost of a well-managed, diversified portfolio should not decline to 0.01 to 0.02 percent over the next five to ten years.
Overall this evolution over the next decade will translate into the opening and funding of tens of millions of new retirement accounts and will build trillions of dollars of additional wealth on top of the $25 trillion in total retirement assets today. This is going to be great.
Disclaimer: Investment data is provided for informational purposes only. Investment outcomes and projections are hypothetical in nature and intended to be illustrative. Accordingly, such information is not intended to constitute investment advice nor an assurance or guarantee of future performance. Past performance does not guarantee future results. Investing involves risk and investments may lose value.
The views and opinions of the author are his own and do not necessarily reflect the view of the Aspen Institute Financial Security Program or its funders.
