Guideline isn't actually "fixing" your 401(k). They are primarily just competing on price. Employers can already get a decent 401(k) from Vanguard, which obviously offers access to their low-cost funds. Guideline doesn't appear to be offering anything fundamentally new (in contrast to, for example, robo-advisors). If I were setting up a 401(k) plan for a company, I'd probably just go with Vanguard, with full confidence that my provider will not undergo any "growing pains" or even cease to exist in 5 years.
Hi, I'm the CEO of Guideline. I think you might have fallen into the same trap I did a few years ago. All 401(k) plans are not created equally, and it's not just about the fund menu etc. Vanguard for instance, is not a fiduciary. They will not help you keep your plan in compliance, they will not educate your employees. They don't even do their own record keeping. You will need to pay for those services separately. We are making great 401(k) plans attainable for the small business while focussing on the long term success of your employees.
Thank you for replying. I did underestimate your company.
I think it would be useful to add to your website a prominent comparison to the entrenched players. I'm probably not the only person to fail to appreciate your advantages over Vanguard, based on your current website (though perhaps I overlooked something). A convincing comparison to the quintessential low-cost provider would deliver quite a powerful message.
Appreciate that feedback. We are really focussed on the product and have not spent enough time on the marketing site. I'll pass on this feedback for sure!
So you're saying that instead of (for instance) signing up with both Principal (who has the funds) and also TRA (who ... does something) ... a firm just signs up with you and it's a one-stop shop ?
What is the total fee load for your plain old S&P 500 index fund ?
They're just Vanguard + 0.03% custodial fee. So whatever institutional version of VFIAX they can get + 0.03. Maximum 0.08% if they only get the retail investor version (0.05%), minimum 0.03%.
I am waiting on the hammer to fall on 401k. Here is the current situation.
401k is a horrible idea, and its a good way to funnel money from savers. After 2000 & 2008, do you really want to trust the same people who needed bailed out? Yet, 401k is using those institutions to do business with.
401k is a wolf in sheeps clothing. The next down turn, who knows, governments have been known to seize retirement funds. What happens if US Congress decides to do that to save the nation? Look whats happening in the world, it has already happened in the last year in other nations.
My advice, stay out of 401k, put your money where it has intrinsic value, and not a number on a computer screen.
Essentially all assets, except perhaps gold^H^H^H^H commodities in your physical posession, are numbers on a computer screen. Even land ownership is controlled by records kept by local governments.
This is clearly true, but the scenarios in which it becomes a problem vary. In an isolated case of data loss/corruption that leaves the title to your home up in the air, there would be other sources of data to appeal to (records at lenders who had paper on the property, etc.) In more apocalyptic scenarios, even your on-hand physical assets won't be good for much (you can't eat gold).
Sure, but the person I was talking to wasn't talking about data loss. He was talking about asset seizure by the state. If they're going to seize my 401k they're just as likely to size my rental property.
And ya, in apocalyptic scenarios the value of assets could swing wildly. I've seen Mad Max though. I'm not buying gold, I'm stockpiling guzzoline.
What's the alternative? You can contribute to an IRA instead, but the limits are much lower. Any other investment products on the market will not be tax-advantaged.
The 401(k) was created by Congress (it's even named after the section on the Internal Revenue Code that created it) and that's where its benefits come from. The only way a similar plan would ever emerge is if Congress decides to create that too.
> The next down turn, who knows, governments have been known to seize retirement funds. What happens if US Congress decides to do that to save the nation?
How would the US government do that? Your 401(k) money is held by a private bank; the government would literally have to seize private property, which on this scale and circumstances is completely unprecedented in US history.
Here's an interesting hypothetical of someone who always invests over their life st the worst possible time (right before crashes). He still comes out pretty well
Intrinsic value is not a thing. Stuff only has value if others are willing to buy it. What others want, and what prices they are willing to pay, change all the time with market conditions and consumer tastes.
Selecting a short time scale is not representative of anything. 401(k)s are meant to be long-term investment vehicles for retirement.
Let's say I've nearly worked 30 years and I'm hoping to retire soon. Had I put my money all in silver, the top performer in your YTD chart, I would have over tripled my initial investment. However, putting my money in the S&P500 would've given me a 10x return over the same period.
When it comes to buying equities or commodities, I typically prefer equities. Companies can innovate and grow and create new value that didn't exist. But a pile of precious metal today is the same pile of metal tomorrow.
Your comment suggests that Vanguard is low-cost, which it is for the consumer in the form of low expense-ratios. But how do Vanguard's administrative costs stack up for the employer?
FWIW this tends to happen with smaller employers that are scrimping on administrative fees. I've found that the situation is generally improving though as people become more aware of what a great 401k plan should look like.
I've also learned to not worry about it so much. You'll generally only stay at an individual employer for a few years. After that you can roll over a 401k into a low fee IRA held by Vanguard (or whomever you prefer). In the end a few years of high fees with a relatively small $ balance shouldn't negatively impact your returns too much. Of course if you're one of those rare folks who spends a decade or more with a single employer you might want to think about things here differently.
> I've also learned to not worry about it so much. You'll generally only stay at an individual employer for a few years. After that you can roll over a 401k into a low fee IRA held by Vanguard (or whomever you prefer)
You can also do a backdoor Roth conversion when you rollover your employer contributions (which can't be Roth contributions.)
On one level, yes. Excessive fees suck. Bidding them down is great! But it's not the core problem.
The 401k system, as it stands, is designed around extremely confused envy. Rather than allowing workers good tax-advantaged options for their retirement, it aims to give them the same options as The Man who currently employs them, in all his mustache-twirling evilness, irrespective of that Man's complete ignorance about mainstream IRA advice.
Did that otherwise-respectable business have an HR moron set up the plan, and not have index funds? Too bad. What does your retirement savings have to do with your current employer? Why should they be so tightly coupled? Well, no reason, but remember that envy above? The plans require that savings (sorry, "contributions") have some parity with those of highly-compensated employees of that same employer.
A sane system would allow anyone the same (index fund) options as say, federal employees, and not care whether some arbitrary cross-section of workers at a particular employer are saving nearly the same amount. As long as we have these Byzantine rules that put you at the mercy of your current HR department and confusedly envious legislators, we're stuck with it -- that is the problem.
It $20 per year for an individual 401(k) account (commonly used by owners of small businesses).[1] One could assume the rates for regular employer 401(k)s are similar.
That's slightly less than Guideline's 0.03% fee, for accounts with large balances. A $100k account would pay Guideline $30/year, and a $1mil account would pay $300/year. Although most Americans probably don't have that much in their 401(k)s.
Considering a lot of people will have low balances, Vanguard and Guideline cost almost the same.
I think the decision for a small business now comes down to just three factors:
1. Does Guidelines have a better website/app user interface, and better customer service?
2. Vanguard is a well-established company. Guideline is small and new.
3. From the business side of things, is Guidelines easier to work with compared to Vanguard? I.e. with things setting things up, adding new employee accounts, etc.
I'd go with Vanguard just based on factor 2: because they're well-established and fairly trustworthy, and being investor-owned, they're not trying to profit off of their investors.
I'm Roger Lee, the CEO of Captain401 (YC S15). We offer a robust 401(k) platform and investment advising service that also serves small businesses and startups.
We're more comprehensive and our pricing structure scales more favorably for growing companies. We act as your outsourced HR team by taking care of all of the 401(k) setup, ongoing administration (including sync with all major payroll providers), IRS compliance, and employee support to save you time. It’s a great fit for companies looking to scale.
Hi Roger, Please elaborate on the more comprehensive comment. We have all you mentioned and more without those excessive AUM fees. We don't outsource core functionality. Captain401k is not a recordkeeper. Your pricing structure also does not account for small businesses and completely disregards the detrimental costs to the plan participants. I'm not trying to pick a fight here, I understand how hard this problem is and the more people focused on it the better. I just wanted to clear up the inaccuracies.
Yes[0] they do that and it is a bit pricey if you are quite small. We investigated them when setting up our 401k and found the fees to be a bit difficult to swallow for a 3 person company.
Our small company has a SIMPLE IRA through Vanguard. It costs $25/year (waived if you have $50k managed with them across any type of accounts) plus the mutual fund costs, which are very low. Almost no paperwork to get it started.
Definitely worth looking into for small businesses.
Eh. The funds are actually held at Vanguard, so you could easily roll this over to them upon failure of Guideline (or even before). This all comes down to what your small employer can do.
Just want to be clear the funds are actually held at the custodian, not at Vanguard. That's why it is super important to have a well established Custodian. You can always rollover your funds in a qualified event to another employee sponsored plan or an IRA. BTW you can do that with most publicly traded funds, and you could also do a cash balance transfer.
They don't state which Vanguard funds you'll have access to (though they explicitly say they just use passive ones), but apparently there is an option to have the employee do a custom allocation within their menu of funds. Given the .10% expected fee for the underlying mutual funds I'm guessing they're assuming investor class (like VTIAX), which is pretty fair!
A one-time, $500 setup fee, and $8/month per employee is pretty great. The .03% custodial fee to the employee isn't bad either.
Again the big hurdle for a small startup / business is even being able to offer these (contacting Fidelity and Vanguard is sadly awful as a small person without company history or at least 20 employees). Glad to see competition in this space!
Thanks for the support. I'll get you a full list and have someone followup. Here is a quick screenshot of my customer portfolio so you can see some of the funds quickly. https://cloudup.com/c_kk6Zi5jC1
We own this fund in spite of the fact that its main goal is tax efficiency (given that the efficiency is not needed in retirement accounts). Though the fund is outstanding for tax purposes, it also boasts low turnover, broad diversification, and an extremely low expense ratio of .11% (category median is 1.24%) considering it is not a “true” index fund. The S&P index it follows promotes low turnover, which lowers trading costs. The fund does not own as many mid-cap companies as rival funds and stays true to the small-cap arena, with at least 80% of its holdings in small-cap. This prevents unnecessary redundancy in an overall portfolio.
My small company employer has offered Fidelity Keogh plans for years and now SEP IRAs. We get full brokerage window access, including low cost Fidelity mutual funds, commission-free low cost iShares ETFs, $7.95 commissions on all other stocks and ETFs, free Treasury auction and secondary market bond trades. I don't think it's costing the employer much of anything.
I have my company 401k with Vanguard, and I'm a single founder. I do have a single-k, so it may only be harder to set it up if you have two or more employees.
Yes. The Small Business Plan (not the single one) is harder / more annoying. It's also improved a lot in the last five years, but the fact is that Vanguard / Fidelity still don't really compete for this business (yet) and are happy to have these folks figure out the recordation, ERISA, etc. issues.
Do you have any revenue / income yet? Did you raise funding and thus are paying yourself a salary? I'm genuinely curious about single-person 401k plans in the absence of real revenue...
> Do you have any revenue / income yet? Did you raise funding and thus are paying yourself a salary? I'm genuinely curious about single-person 401k plans in the absence of real revenue...
I've been running the business full-time since 2010. I'm paying myself a salary and haven't taken any funding. I don't have plans to scale massively or hire employees.
As far as I recall, I don't think Vanguard cared one way or the other about how much revenue the company was making. It's been a while since I set it up though. :)
I just mean you need revenue to pay yourself such that a tax-deductible contribution to a 401k is actually tax deductible. (Being a solo person with revenue is absolutely fine, I wrongly assumed you had done this recently and thus might be pre-revenue).
Tangential question, but is anyone else worried that the rules of 401(k)'s can be changed at a later time. History has shown that retirement funds are highly valuable sources of money that companies and governments eventually eat away at. Pensions funds were eventually raided by companies. And social security has been used for alternate means by the government. Is there anything that prevents the government from changing the rules of 401(k) plans at a later time that allow them to be misappropriated as well?
I am not a financial professional so hopefully someone else will chime in, but...
My understanding is that your 401k can't be pilfered directly by the government since they don't hold it. This is different from pensions where the company actually held the pension money and changing the terms led them to actually take it.
The government CAN get at your 401k money using the same technique you are calculating against with respect to ROTH accounts. That is, since it is tax deferred, you're essentially betting that you'll be in a lower or at least equivalent tax bracket compared to current when it comes time to pull that money out.
It's conceivable that they just up the tax rates enough that when it comes time to pull your money, the government can get at as much of your funds as it likes based on taxes alone.
I'm sure there are other risks involved, but that seems like the most obvious.
Since the 401(k) laws are federal laws within the IRS, couldn't that law be changed at any time by the federal government? Based on history, it seems naive to think that trillions of dollars sitting in retirement accounts would not be eventually re-purposed.
How is that any different from social security though? Social security taxes are being taken out of every american's paycheck as we speak. Yet, anyone under the age of 40 or so has no illusions that social security will be solvent by their retirement age.
It's possible because you don't have a Social Security balance. There's no statement that says "you personally have $250k in your account" like a 401(k) or IRA does. So, no one notices when Congress goes fishing in it.
Frankly, I (34) do think it'll be solvent by my retirement. It'll still have funds to pay about 3/4 of current benefits without changes to the system. As it gets closer, political change will likely get easier as Congress doesn't want lose their cushy jobs en masse.
I actually get a letter from the government every year showing how much money I have put into the social security trust, and how much I can expect when I retire if I keep putting in the same amount as I did last year.
Ultimately since it's a huge trust fund of course there's no "You have X money in the bank", but it does say I should expect "X money per month" when I retire. It'd be nice if it showed details of the trust fund overall.
I get those too. Note that nowhere does it claim the amount you paid in is your balance. Your benefits won't go up if you retire at 100 years old. Your benefits won't run out if you live to 500. It's not like a 401(k) or IRA, where you have $x dollars in it that's your money and have to budget your withdrawals.
They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them. No one gets their next statement and asks "hey, where'd my money go?"
That's why it's politically safe to raid, at least in the short term.
> They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them.
Right.
They do say, "Your estimated benefits are based on current law. The law governing benefit amounts may change. Congress has made changes to the law in the past and can do so at any time." At least.
One way to think of the Social Security fund is that it is invested in one of the safest instruments in the world: loans to the US government backed by their "full faith and credit".
What's going on is that the tax-cut crowd is hoping to default on those loans so their taxes don't have to be raised to pay it back. Part of their political strategy is convincing young people that the fund will disappear for unexplained reasons, or that it's not really a fund. It's part of a long-term, multi-generational plan to transfer tax burden from the wealthy to the <$100k crowd that started with Mr. "lower taxes" Ronald Reagan increasing the SS tax.
Another possible way is means testing. If you've saved enough for retirement on your own, you don't get social security. Personally I think this scenario is one of the more likely ones.
I hope not. One would have to exclude benefits to a lot of people who have been paying the top tax rate for SS to save any significant amount of money. In effect, this would be a retroactive tax. SS has never been a means tested program.
See also:
> Social Security benefits are relatively evenly distributed among retirees. The vast majority of benefits go to people who are low- or middle-income by any standard. This means that a means test that is focused on taking back benefits from upper income retirees is likely to raise very little money...
> This suggests that means testing is not an effective route for reducing the cost of Social Security.
You raise a very good point that means testing wouldn't save very much money unless the cutoff was very low and cut into middle-income retirees.
So perhaps my guess about this is wrong. It just seems so politically easy though. "Why should millionaires get SS benefits while the middle-class suffers?" is a good sound bite.
Changing the law would mainly affect older people. And older people vote in very high percentages. Politicians are very, very careful about doing things that will make older voters angry.
This doesn't make sense to me. The entire point of Roth is that you pay tax up front, and then the retirement proceeds are tax-free (assuming you withdraw after proper age, etc.). To then go and tax these withdrawals is basically neutering the entire Roth deal - I think there would be some pretty major political backlash on that.
What is the percentage of Americans with assets in a Roth IRA compared to the number of Americans who would rather see someone else pay for a tax increase? Politically, altering the deal on Roth IRAs could work out quite well.
I don't know the answer to that, or about Roth 401(k) plans, but I think there are a lot of people overall with one or the other. I think that threatening either would have an effect similar to threats on Social Security, without the justification of it being insolvent.
IMO, at worst, Roth plans could get phased out for new contributions with existing deposits and the tax-free withdrawals honored.
Roth 401k and Roth IRA are taxed now (it is post-tax income you contribute). Traditional 401k is taxed when withdrawn. I believe you have it backwards.
You effectively can't stop political risk - though they don't normally change it retroactively
Having said that the tax benefits are not that great in the US - Higher rate tax payers in the UK have faced savage cuts to the tax benefits. In some cases older doctors/ headteachers have to retire early as they would hit the life time cap if they went to 65
The rules for 401(k) will no doubt evolve over time, within the same legal / political protections and risks as anything else. Although I wouldn't be worried about outright appropriation, it's quite possible a modest tax could be introduced, then then rise over time - who knows what could happen over 30 or 50 years.
This, and the administrative overhead and inflexibility of 401(k) plans, 529 plans, health savings accounts, etc make me steer clear where practical. I use my employer's 401(k), contribute the amount needed to get the full match available, but that's it.
Beyond that, I'd rather pay my income tax up-front at the going rate instead of at some mystery future rate, and keep my savings and investments as unencumbered as possible.
>Beyond that, I'd rather pay my income tax up-front at the going rate instead of at some mystery future rate, and keep my savings and investments as unencumbered as possible.
The advantage of delaying tax payment is you have a larger upfront basis. With compound growth the initial amounts of invested capital carry _much_ more weight than later invested capital.
If you had $18000 dollars and had the option of investing it all and paying tax later or paying tax now and investing the rest, you'll end up with the same amount.
If you have $24000 to invest, your two options are:
1. Invest $18000 in a 401k, pay tax on it later. Pay tax on $6000 now, invest the rest and pay tax on the gains later too.
2. Pay $6000 in tax now, invest $18000 in a Roth account, pay no tax on it later.
The second one is better because it's essentially letting you put more of your earnings into the tax-advantaged account.
Good point. So the assumption to defer tax must be that your tax rate will go down because your withdrawal tax bracket will be smaller than your current income bracket?
"The past is the key to the future". If you have 20-40 years of saving ahead of, look at what happened in consumer tax law the past 20-40 years. The first public deferred income savings just began in 1980 only 36 years ago. 401Ks became common in the 1990s about 25 years ago. Roths only this century. Capital gains taxes were lower than income taxes 1977-86 and 1994 to now. The tax free home gains deduction started in the late 90s.
The point is that retirement tax vehicles changed a lot in recent decades making it quite likely they always will in the future. Take advantage what you can now.
But weren't all of these vehicles put in place by the baby boomer generation? And said generation will be retiring more and more in the future and also living longer. This would seem to mean that those people will be moving their retirement money from stocks to bonds or withdrawing it completely. Would this not require an equal amount of investors to take their place? Additionally, if this generation of baby boomers lives longer and runs out of money, is it naive to think that some kind new laws would be required to support them in old age?
Boomers were never fully in the self-savings pipeline since these savings accounts were only available mid way through their careers. Your point is more valid for GenX which is the first group fully expected to save for themselves.
One of my biggest problems is that what you say is true in the way you mean it but it isn't really true. The way an employer gets at it is passing along all plan costs to the employees who then have their accounts debited every quarter for those costs. I think making employees pay for the benefit really lessens its effectiveness as a benefit (particularly if the plan has no matching).
Another way this is a problem is that the fees are typically debited from the employees based on their balance in an account. So if a 20 person company has five employees with very large balances and fifteen employees with very small balances then the five employees with the larger balances are subsidizing the other fifteen. You end up penalizing the people who have been the most dedicated to saving for retirement.
It seems like Guideline and OctaveWealth (mentioned in the comments) combat this by charging a recordkeeper-style per-participant fee rather than the percentage of assets that are typically charged by advisors and custodians.
Actually guideline is charging the participant fee as 3bps, which is a percentage of assets (but this is spectacularly low). They are charging the employer directly the per participant fee.
They've the power to add taxes to 401(k)/IRA withdrawals in the future. I think it's unlikely - it'd be political death to whoever proposed it - but it's theoretically within their abilities.
They could realistically change the tax structure or even the retirement age(s) at which you could withdraw the funds. But if there were another mega-stressor to the financial system in the future, it seems that this pool of trillions of dollars would be ripe for the picking. Let's face it, lobbyists get what they want. Not the people. So if the bank's risky investments cause a panic and the only thing preventing an economic meltdown is the re-purposing of 401k funds....well...
I highly doubt it would be that direct. A realistic way to do this would be to change the tax structure based on age. Meaning, the only way to extract the money without incurring severe penalty would be to do so after some advanced age. Then put in place a rule that any funds left after death become part of a new social security style safety net. Likely for the ever-increasing number of baby boomers who are retiring and living longer than ever.
Yeah, that's my point. You're talking about a retirement plan that impacts retired people who vote in droves. For the considerable future, those retirement age people will be baby boomers. They also happen to run the government. So why would it be unreasonable to expect them to pass laws that are favorable to them during their retirement as opposed to our retirement in 20/30/40 years.
401k plans typically consist of employee and employer matching contributions. But in any case, the things that stops you from fully accessing this money of your own free will are laws. Laws can be changed. I'm just wondering if today we're being as naive about 401k realities as people were about social security and pensions a generation, or two, ago.
Employer money is going to be a smaller amount of your 401k, if offered, and not always guaranteed, as sometimes subject to vesting so you wont' necessarily get it, but even so that's a stark contrast to pensions and social security, where all of your money is coming from someone else in the future.
I don't really see it as a stark contrast. Pensions and social security may be accounts where money is coming from someone else in the future. But a 401k is only semantically different. You do not own your 401k account in a real sense. That money is locked and kept away from you. You can only withdraw that money according to the rules in place at the time of the withdrawal. If you wanted to take that money out now, you would be paying the penalties in place that exist today. In 20+ years from now, when you intend to withdraw, you will be doing so with the laws in place at that time. And what those laws will be are unknown at the time. The same as current conditions were unknown to partakers in pension funds and social security a generation, or two, ago.
I think this is huge. Retirement is totally full of people reaching in for nothing.
It started with "we will manage your money with secret investments, for 2% fee and 20% if we beat a benchmark".
With enough math and science, people moved into index funds. Except index funds through a 401k can easily be 1%+ extra fees. This is an awesome way to avoid that.
The only irony, is that the founder made taskrabbit, which is part of the gig aka no retirement for you economy. Only other people who can afford task rabbit have a 401k, not the actual doers.
Seems like the founder is pretty in-tune with macroeconomic trends and is getting out ahead of them to build solid companies in large, no-frills markets.
Steady employment on the decline? Create a marketplace for contractors and odd-job-doers who need to scrape together some rent money.
Retirement plans getting the fat squeezed out of their returns in a ZIRP world? Cut down unnecessary costs that may have been overlooked previously.
I am actually becoming a bigger fan of etfs. Generally lower fees, can set a limit instead of buying/selling at end of day blind, and you actually get the dividends from the stocks for a dividend etf.
I am not at all clear why you wouldn't do this if you are just tracking an index.
If you are playing for the long haul, limit orders do not matter. Place a buy once per month for 1/12th of your commitment, and forget about it.
For fees sure - see what fees are lowest for you (ETF vs Mutual fund). Last time I did the math for me, mutual funds ended up giving me more money in my pocket at the end of 10 years, because of no trading fees. I think if you reach a certain point in 1 purchase (100k??) ETF wins. Maybe the optimal strategy is to use a mutal fund, then when that fund hits 100k - sell it all off and put in an ETF for a lower yearly fee. Have not done the math when the exact right place to do this is, would be curious. But I know if you are doing small 400-2000 buys per month, ETF fees add up as a % of the price.
Mutual funds still throw off dividends. It's just common to reinvest them. If you're investing for the long haul then being able to set limit orders isn't really that important. Being able to buy/sell fractional shares is pretty nice.
No, the main differences are on the upside, with an etf you tend to get a better net expense ratio, and they can help you avoid some cap gain tax because of how they can handle stock exchanges, and on the downside, bid spread when there is low volume, which an bite you in the ass.
Congratulations on launching! I'm particularly impressed you are doing the recordkeeping in addition to advisory. I look forward to crossing paths with you someday.
I'm also starting a company in the 401(k) space though focusing completely on the educational aspect. While making it easier for both the employer and employee is something to strive for I believe education is a component that many overlook and is of particular importance for the less highly compensated employees who don't contribute enough to their 401(k). "Financial wellness" is the industry buzzword but for me that means getting people financially prepared for all of the big life events between the day they start work and the day they retire. A participant with a budget, emergency fund, and a plan for their financial goals is going to be less stressed and more able to focus on the long-term goal of retirement.
It actually looks like Guideline is a better deal for having Vanguard funds in your 401(k) than even having Vanguard itself manage it. I can't find Vanguard's administration fees on their site (not a good sign), but they also got sued for overcharging in their 401(k) plan that they had setup with Anthem:
"Plaintiffs also allege excessive fees paid to Vanguard for record-keeping services. Over the period 2010-13, the plan paid approximately $80-$94 per participant for record keeping, both through hard-dollar and revenue-sharing fees; in September 2013, the expense was lowered to a flat annual $42 fee per participant. However, the “outside limit” of a reasonable fee for the plan would have been $30, according to the complaint."
I'll be the first to admit that I don't know too much about investment, but isn't the typical advice to pretty much ONLY put your money into the Vanguard Target funds based on your year of retirement?
This is some relatively widespread retirement knowledge, and is frequently referenced by the likes of r/personalfinance, r/investing, etc.
How does Guideline somehow out perform Vanguard who's been the king of this forever? Serious question.
They're talking about 401(k), not IRA, which means it has to be managed by a custodian on top of what ever fees a fund charges.
Guideline is trying to be the Vanguard of 401(k) custodians.
The second hand info I have from a startup (that I worked at) negotiating with a 401(k) provider leads me to believe that are basically 2 common 401(k) setups in the industry.
In the least bad case, the company pays a bunch of money to the custodian in exchange for the custodian giving the employees access to good funds (vanguard institutional shares).
In the more bad case, the company pays the custodian nothing, and the employees only get access to funds that kick money back to the custodian. As you might be able to guess, these funds typically have quite high fees.
Huh - I hadn't realized they were. Most of guideline's copy focuses on low prices, so I assumed that that's an effective way they could differentiate themselves.
I think the important thing to understand about this space is that a custodian is required by law, and that their fees they take are (conceptually) separate from the fees your funds charge.
Hi I'm the founder. The copy is not meant to focus on low prices, but rather low expense for the participant. I understand that might be coming through. You are correct on the custodian fee, that is a pass through and having a custodian is great! Appreciate the feedback!
Incorrect info here. We are not trying to be the custodian in any way. It's actually quite important that the custodian is separate and that is why we did not bring that service in-house.
Im European so I don't know much about the retirement plans, but as I see it, the costs are the biggest issue here. Mutual funds rarely outperform index funds, so why not just stick with the passive index funds that have substantially lower costs & can be traded like stocks on the market (anyone can buy them)?
In the US system, money which goes in certain sorts of retirement plans (like a "401k") is not subject to income tax (at least not in the same way as the rest of your income). But the definition of a "401k" plan requires that you can NOT control the money and make the investments yourself. Instead, you must pay someone else (the "401k plan provider") to control the money for you (typically they offer a small selection of investments and let you pick how to allocate your money among those, then they invest it according to your instructions).
These 401k plan providers charge fees. Typically fairly substantial fees (like 1%) and typically the fees are well-hidden. By "well-hidden" I mean that it probably takes a knowledgeable researcher months to find out what the fees are -- I've certainly never known the fees for any plan I've ever had.
This startup purports to compete by charging fewer fees 401k plan provider fees.
I'm wondering, is there such a thing as a self-directed 401K where you can control exactly your 401K money goes? If so, would employer matching work for these self-directed accounts as well?
There are some, but you wouldn't be able to buy shares in the better classes of mutual funds, like Vanguard InstlPlus. Those rely on the whole company buying the same shares to meet the minimum investment requirements.
My last company had a 50$ per year option that let you buy and sell any stock or few thousand mutual funds. Funds where low cost so it did not seem worth it, but YMMV.
i've worked for a company with a plan that offered something like this, however there was an additional fee on top of whatever the costs were. And like the sibling comment says, you get the public etfs, which wont get any bulk savings(oh how i miss my 0.02% ER institutional shares). You are unfortunately still stuck going through the company the employer chose. Very rarely you can get a plan that allows you to roll over while still employed, so if you did that say, annually, you could self direct then.
employer matching was separate, you and the employer add money, then you choose what to do.
IMHO, 401k should go away and the deductible limits on IRA should be raised to compensate and let people do their own thing.
Oh, does "this" in the first sentence read as guideline? I meant it as, I had a plan with a self directed option, basically direct access to their full brokerage. Didn't think you had any additional fees
Yeah, some plans offer self-directed brokerage options, with an administrative fee on top of things. Otherwise, with, say, Employee Fiduciary (one of the dirt cheapest Vanguard-backed administrators out there), we chose 40 funds to offer our employees, though almost everyone has just stuck with the Vanguard Target Date options.
The default advice should probably be that, but if you look at the old Defined Benefit schemes there are very good reasons that they diversify away from pure equity/bond splits to grow their assets. In fact you should look to the large endowment funds too in terms of what a best practice asset distribution looks like.
The "stick it in a low cost tracker" model is fine, and in instances where you get shitty access at shitty fees makes excellent sense. However, Property/Reinsurance/etc are good sources of return which do not correlate as strongly to markets in general (Although property at the very tails tends to).
The Aussie super-fund stuff is interesting reading for this stuff as they manage to get the economies of scale required to make access to alternative betas vaguely affordable.
Not all the funds are that high. The .18% vanguard quotes is their real, across customers, result. Their more active funds are higher (like VEXPX at .49%) while their larger scale Admiral funds are often as low as .05% (like VTSAX).
Vanguard ETFs offer the same rates as the equivalent Admiral class shares, so services like Wealthfront use those. Wrapping Vanguard is a lot easier these days ;)
how does that compare to other fees all in? Obviously the employee cost is really good, but is the typical 1-2% employee fee company just passing that $8 onto you? Especially in lower paying companies, that could add up
Could you elaborate on how you got those numbers? You lost me at $56 but I don't understand your percentages either so perhaps I'm missing something here.
My guess is that they're focusing on new plans, not allowing rollover from previous plans and not allowing employees to keep the plan after they leave the company. In this situation they're able to have mostly savers with low or very low balances, and they charge on average higher fees than Vanguard and others.
Hi I'm the CEO of Guideline. This is a common misconception. It's actually the topic for my next blog post. Target Date funds are just funds of funds. Your paying nearly twice the expense ratio for the same underlying funds. They charge the extra fees because they change the fund allocation for you as you age.
I am looking forward to this upcoming post about why you decided to avoid target date funds. Specifically I am curious how you calculate that target date funds have nearly twice the expense ratio compared to guideline. VFIFX (https://www.google.com/finance?ei=CWOOUpC2CO-bsgfSRw&q=VFIFX) has an expense ratio of 0.16% while guidelines is 0.13%. Cheaper, yes, but not twice as cheap.
Even in the retail segment, the target date funds don't have "Admiral" options. So you see 0.16% with VFIFX, 0.05% with VTSAX, 0.12% VTIAX, 0.06% VBTLX.
A 3-fund of VTSAX/VTIAX/VBTLX can average around 0.08% for the same underlying asset allocation as VFIFX at 0.16%. That's roughly double.
Yeah, that's not the case for us. We do have Vanguard funds amongst other low-cost mutual funds. We also have our own investment committee which evaluates and adds funds as appropriate. We have no fund relationships and do not make commission.
Wow those are some razor thin margins! If you can pull this off it's going to be both huge (from an AUM perspective) and a big win for the 1,000s of companies that want to setup 401(k) plans but are either scared off by the complexity or fee structure.
I do wonder if profitability can be sustained. With an average account size of $50K, you're looking at $50K x .03% + 9 x 12 = $123 per year of revenue per participant. I'm sure there's a scale factor to dilute the common expenses on your end, but a few hours of customer service (per participant) will eat through all of that.
Thanks for your support. I'm the founder of Guideline, Kevin. I just want to be clear. The .03 custodian fees is not paid to Guideline. That is a direct Custodian cost. We work everyday to lower all participant fees. This is our primary goal. Scale is reachable and the business economic are solid ;), thank you for the post!
Wait, really? Guideline's only revenue is the $500 setup (like the custodian cost is this mostly going directly to expenses?) and the $8/employee per month?
That seems like a dangerously small SAM to me. Any large employer will want to negotiate the $8/employee. And there are only so many small employees in the US. How does this work out?
Interesting. That led me to ask my original question which is how many employees that represents, which led me to [1] which states:
> According to U.S. Census Bureau data, employer firms with fewer than 500 workers employed 48.4 percent of private sector payrolls in 2011, and employer firms with fewer than 100 workers employed 34.3 percent, and those with less than 20 workers employed 17.6 percent.
which is in line with my memory at the high end (the US is 50% small and 50% large) but fairly surprising at the low end (nearly 20% < 20 employees).
It seems like nearly any ~100 person company is totally addressable without conversation in terms of cost. At 500, it seems possible to go direct to Vanguard et al. (is that a misconception?). But what fraction of the 34%/~100 employee companies would provide a 401k?
The total population is approximately 50M employees, so that on its own seems sizable, I just don't know how to extrapolate that to "and would provide a 401k" (but I know you've thought about this a lot more!). Apparently, tons of employers do! 80% of all employees in the US and 90% of those at >500 firms [2].
Color me surprised. I had a vision of a vast mom and pop sea (~1 person per firm), dotted with retail / fast food chains all too resistant to offer 401k plans at all. As someone asked elsewhere: who's your competition / who are these folks using as providers? (It can't all just be Vanguard / Fidelity).
>>> In 2010 there were 27.9 million small businesses
Quite misleading no? The link you provided says 78.5 of those 27.9 Million are Nonemployer (business without employees).
So 21.9 million of these businesses are single person businesses (many of which could be side/lifestyle businesses) which I would presume only present $96/year in revenue if they do sign up.
Nonemployer business aren't necessary single-person businesses. (They don't even necessarily have no non-owner workers, since a firm whose non-owner workers are all contractors can still be a nonemployer business.)
Do you provide a 401k for a contractor though? Using contractors is normally a means of offloading costs from a company, that same company is going to provide a benefit that costs them money?
I've had a 401k for 6 years and I've never once used customer service.
Also the older you are and the more you've worked the higher your account balance becomes. So once you have people with balances with $1M+ (which if you're actually saving for retirement you'll need), they'll be drawing much more per person.
From my experience the most common customer service requests fall into the following:
* Enrollment
* Distribution
* Rollover
* Loan
* Panic due to market movements
* Asset allocation/rebalancing
The top three on that list are when you enter or exit a job so if you have been with the same company for those six years you likely would not have used customer service.
I do encourage you to sign up for a meeting with your 401(k) advisor if they come to your office and do those. It is good even as an excuse to look over where you stand.
Tangential question: why are 401ks employer-managed at all? Why can't they work like IRAs? That is, I create a Vanguard account, put money in it, take a deduction at the end of the year? If there's an employer match, give your company the account number to do a direct deposit.
Or better yet, combine IRAs and 401ks and just let everyone deduct up to $20k (or something else that's appropriate) to put into a retirement account you can't access till you're 59.5?
A short answer is that they are replacing employer pension plans so that is how the tax code was constructed.
What you first propose would create a lot more administrative overhead for the employer and payroll company. However I could see that as a genuine business opportunity in the future, or at least a feature for a company list Gusto to implement.
Thanks for the historical context. I guess it kind of made sense to structure it that way at the time.
> What you first propose would create a lot more administrative overhead for the employer and payroll company.
Could you please explain how? I understand it will involve changes to existing processes, calculating withholding etc. But if the company is saved the trouble of finding a plan, administering it (or paying someone to) I would have thought it would be less work overall?
Right now your employer makes a deduction from each paycheck and then one ACH payment (across all employees) to the custodian which the recordkeeper then invests at the participant's direction.
You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing. For a large company that is thousands of additional transfers. The way a company like Gusto could maybe do this is to store an employee's IRA account information like they do their bank information for direct deposit.
Also, FYI, when buying mutual funds through your 401(k) you aren't charged any fees for trading. Through my IRAs at least I get charged a commission for every purchase. With payroll deductions those would add up.
> You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing.
The other replyer already addressed the fact that companies already do this with paychecks.
With what I'm proposing, the only reason a company would even need to deal with an employee's 401K information is if they do contribution matching (which many companies don't). It's up to the individual to make the contributions from their paycheck and claim a deduction on their tax return at the end of the year.
> when buying mutual funds through your 401(k) you aren't charged any fees for trading.
They make up for that with high management fees.
> Through my IRAs at least I get charged a commission for every purchase
Not all brokerages do that. In any case, here it's a fee you're choosing to pay presumably because you get other things from that financial firm that you value. With a 401K your tax break is being held hostage in return for whatever fees your employer managed to negotiate on your behalf.
> You way involves the employer making a deduction from each paycheck and then making an ACH payment for each employee to the institution of the employee's choosing
How is that different from the ACH transfer done into each employee's bank account when paying their salaries?
Per my comment: "The way a company like Gusto could maybe do this is to store an employee's IRA account information like they do their bank information for direct deposit."
And, same for healthcare IMO. Assuming no single-payer system, the group negotiating companies have to do with plan providers is just such a waste. I was part of a 3-person startup last year, and nobody (even going through Zenefits) would even talk to us about a healthcare plan. We were apparently in some edge case that because we were all co-founders and had no employees we didn't qualify for most of the common plans or something. We ended up shutting down before our COBRA ran out so we never ended up figuring this out. But why does the system need to be so complex?
It seems like it could only help entrepreneurship and un/under-employment (less friction to try a new job) for as much of this stuff as possible to be decoupled from employers.
I'd love to come up with a genuinely transformative retirement savings system for the European market too. I built pensions systems in Ireland and the UK for years and my assessment was that the system was completely crazy from a contributors point of view - at least since DC (defined contribution) became the main paradigm.
Previously when DB (defined benefit) was a thing it was crazy from a company's point of view.
And always the extraordinary fees concealed in labyrinthine complexity and regulation.
OctaveWealth [1] YCS12 is also a full stack flat fee 401k.
We provide a very flexible investment menu, with our own Octave Target Risk ETF Portfolios, in addition to Vanguard Mutuals, and fully custom. The Octave portfolios are built inhouse using best of breed Exchange Traded Funds from multiple providers.
I don't know how I missed you having been in the 401(k) industry for so long as well as following the YC graduating classes. I'd love to talk to you for a few minutes sometime.
Excellent! Even betterment, the only robo-investor I see with a 401(k) offering seems to charge 60basis points instead of a monthly fee.
Best of luck fixing the retirement world!
This is pretty awesome. If only there was a way to convince my employer this is the right thing to do. I am around 2% between expense ratio and management fees. Kind of a drag to know something like this is available and not being used...
I am all for improvement in the space, but is this actually an improvement? The premise is to remove wrappers and other fee add-ons, but the product itself is a wrapper for third-party investment funds, which raises the cost of managing a 401k.
Yes, you are in fact misunderstanding the point. We don't wrap anything. We use the same Vanguard funds as you would find in a Vanguard plan. It's the exact same costs. We don't make money based on AUM fees. You're also forgetting about all the other services you need in a 401(k), fiduciary, compliance, education etc. Not available via Vangaurd you have to hire it out and pay AUM fees.
I skimmed through your link, but don't see any numbers on what Vanguard's plan-administration-fee. They did mention the low average expense ratio on their funds, but that's different from the plan-administration-fees which Guideline seems to be optimizing for.
Finance PhD here who also administers and custodies my own 401k plan. 1. Treasuries have 6% volatility, stock market has 18% so your optimal modern portfolio theory portfolio should have 3 times treasuries and 1 times stock. 2. This will give you annualized volatility of around 9%. If you want the 18% volatility that the stock market offers you need to leverage 2x (your portfolio is mostly treasuries). 3. You can use treasury futures to leverage, you make money every 3 months on the roll. There is free roll analysis that gives you the leverage costs on CME website. 4. Your 401k plan is just a 70 page pdf file that you sign. The small business CEO should be the custodian and the fiduciary and just a. sign the 401k pdf trust document. b. open vanguard account on the trust name. c. keep an excel sheet of everyones contributions or have vanguard create sub accounts. 5. Its incredibly risky having a 0.03% custodian. DAO and bitcoin come to mind. Whats the fiduciary bond amount that Guideline has? Max €500k so if someone hacks their vanguard omnibus account and wires the money out they are done.
The problem with retirement is not the fees. It is that the whole structure is inappropriate for a single person who can live between 0 and 40 years after retirement. Either you need way too much or you will run the risk of running short. A traditional benefit like a pension is way more appropriate as there less variability in the large population.
People are happy to sell you variable or fixed annuities. You're asking someone to cover the risk of your longevity though, so expect to have that work out in their favor not yours.
I'm glad to see a startup working to minimize fees in a 401(k) plan. I'm a bit confused by what I see on https://www.guideline.com/pricing, though.
How can you claim "No AUM Fees" if participants still pay 0.13%? Also, do participants pay the 0.03% fee monthly, annually, or something else? What about the 0.10% fee?
The 0.13% is not paid to Guideline. The .10% is the average fund fee (the cost of the mutual fund from the manager, Vanguard for instance) and the .03% custodial charge that is a direct pass through for us. Not marked up in any way. It is important to have a great custodian.
This is a passed on fee, not charged by Guideline, not marked-up in anyway. We are just being transparent instead of wrapping it in the expense ratio like everyone else. It's very important to have an established custodian.
My plan does not wrap this fee into the expense ratio. For example I hold the same fund in the my 401(k) and in my personal account. I am charged 5bps for both of them.
What is the advantage of having a 401(k) instead of a SEP-IRA? My company has stayed small and we are all happy with our SEP-IRA. Our employer contribution seems to be larger than that allowed by a 401(k). I really don't understand why a small company would want a 401(k) over a SEP-IRA.
I wouldn't care about 401(k) fees if they provided a bigger return. The problem is that they don't. At all. None of those managed plans provide a bigger return over a long time horizon than a three-headed fund (50% index, 25% bonds, 25% international indices).
If you're a straight 1099 / sole proprietor as an individual you can set up a SEP IRA. If you establish an LLC you can create a simple-IRA. Both of these allow you contribute money tax deferred and are much easier to manage than a 401k. Plus, you can trade them like any other brokerage account.
For a solo 401(k), you probably don't need the administrative stuff that they are providing on top of Vanguard, so you could cut out the middle man and go straight to Vanguard. Of course, you do have to be self-employed to qualify legally to have a solo 401(k).
The site is completely void of any useful information, and I find it very hard to believe that they can offer good funds with costs lower than Vanguard, when this is such a scale-sensitive industry.
[Edit]
$8/month = $56/year, divided by Vanguard's 0.0018 equals $31k.
Vanguard has fees in addition to their funds' individual fees if they manage the 401k for a small business, though my guess is they are less than $8/month/person.
Having used Vanguard's site to manage my Google 401k, I can say it wasn't (and still isn't) the most usable website in the world, and I have no doubt the plan administration also isn't the most usable thing in the world. Then again, Google was normally pretty smart about which vendors they chose and they used Vanguard (and might still use --- I have no idea).
It is interesting that Guideline's whole blog post was about low cost and almost certainly Vanguard is a less expensive option (in addition to being secure and battle tested and they also probably have hired some lawyers).
When I watched Captain401's (YC company, https://captain401.com) presentation about their similar product, their whole pitch was about how much easier their service made administration and setup of the plan.
Actually, Vanguard is not less expensive. We use the same funds. You pay the same price for the funds in Guideline as you would if you bought them in a Vanguard plan. We don't make money on AUM, ever. We compete on being a full service 401(k) provider, that is not the case for Vanguard. You would still need all the third party services for fiduciary, compliance etc, and you would have very high startup costs and not to mention the lack of payroll integrations. And yes, we have super slick onboarding for employees and an 8 minute sign-up process for the business all without charging AUM based fees.
Same here (and Google continues to use it), but given how little time I spend managing my 401k, if I had the option of getting a very user-friendly product for an additional 0.01% fee, I wouldn't take it.
The problem with disintermediating is that it means you can't make any money either. Looking forward to the blog article when some blockchain community is undercutting your 0.13%
Yeah, what is the secret sauce that lets them be profitable on only 3bp and provide a fund expense of only 10bp? All the roboadvisors are a 15-25bp wrap and ~16bp funds fees. A 401k provider is naturally more costly since there are compliance issues.
No secret sauce. We are a SaaS company, not an AUM fee based company. We are not a robo advisor. We focus on retirement, tax advantaged accounts not cash accounts. Compliance issues are perfect problems for computers to solve ;)
