How I'm fixing the 401(k)
blog.guideline.com
blog.guideline.com
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.
What is the total fee load for your plain old S&P 500 index fund ?
https://www.guideline.com/pricing
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%.
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.
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.
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.
http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
YTD http://www.barchart.com/commodityfutures/leaders?type=pl&cat...
12 Month looks similar.
Silver, Soybean, Sugar, Gold are up significantly.
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.
And then you ask HR what the fees are and they have no clue.
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.
You can also do a backdoor Roth conversion when you rollover your employer contributions (which can't be Roth contributions.)
Isn't the price the key thing needing fixed?
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.
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.
[1] See: https://investor.vanguard.com/what-we-offer/small-business/i...
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.
If you have any questions, let me know! https://captain401.com
It was my understanding that they could not, but I could be wrong.
[0] https://institutional.vanguard.com/VGApp/iip/site/institutio...
Definitely worth looking into for small businesses.
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!
- VTSAX - VTMSX - VMVAX - VEMAX - VIGAX - VTMGX - VVIAX
Do you also have VTIAX? (International fund, equivalent to VXUS etf)
What am I missing?
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. :)
You should probably set this up and then you can have it redirect to your www subdomain.
I hit this page by accident when trying manually dropping your blog subdomain to visit the site.
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.
It was possible with pensions because they often weren't privately held accounts, and people didn't have individual balances they could consult.
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.
You can view it online anytime here, actually: https://www.ssa.gov/myaccount/
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.
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.
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.
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.
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.
Source: http://cepr.net/documents/publications/ss-2011-03.pdf
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.
How did "we're showing up to physically seize all of your gold" play out ?
IMO, at worst, Roth plans could get phased out for new contributions with existing deposits and the tax-free withdrawals honored.
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
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.
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.
Just an alternative aspect to keep in mind.
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.
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.
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.
You could pass it, but I suspect all of Congress would be out of a job the next election.
https://fivethirtyeight.com/features/what-baby-boomers-retir...
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.
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 not at all clear why you wouldn't do this if you are just tracking an index.
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.
For other references on ETF downsides see http://www.investopedia.com/articles/mutualfund/07/etf_downs...
What do you mean by rate increases?
Vanguard brokerage is funded by its ETF expense ratios; Fidelity by kickbacks from ETF ER as well as subsidized by other products they sell.
But I'm also confused why you suggest doing 400-2000 buys per month. That seems very high to me for a long-term retirement portfolio.
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.
"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."
http://www.investmentnews.com/article/20160105/FREE/16010997...
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.
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.
(My 401k is managed by Vanguard)
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.
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.
Sounds like the USA's Openednded mutual funds are even more dodgy than the uk equivalents (unit trusts)
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.
Vanguard is customer-owned, while Guideline is not. That is an important distinction, regardless of current low fees.
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.
Avg. fund expense of 0.10%
0.03% custodial fee
Seems like a great choice for a business.
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 ;)
So if the employee has in his 401k:
- $20k, the equivalent fee is 0.41%
- $50k, the equivalent fee is 0.24%
- $120k, the equivalent fee is 0.18%
- $200k, the equivalent fee is 0.16%
- $1M, the equivalent fee is 0.136%
56 = cost to employer
Capital = how much the employer has in the 401k
0.13% = average fund fee
So if Capital = 200k
Percentage = [56/200k + 0.13%] = 0.028% + 0.13% = 0.16%
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.
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.
Basically, with component funds, you can always implement a target date glide path. You can't get the component funds usefully out of a target date.
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.
Either way, best of luck, this looks awesome!
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?
> 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).
[1] http://sbecouncil.org/about-us/facts-and-data/
[2] http://www.americanbenefitscouncil.org/pub/e613e1b6-f57b-136...
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.
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.
* 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.
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?
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.
> 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?
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.
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.
How is that different from the ACH transfer done into each employee's bank account when paying their salaries?
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.
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.
Vanguard can manage your company's 401k directly at a lower cost: https://investor.vanguard.com/what-we-offer/small-business/o...
Perhaps I am misunderstanding...
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 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.
So if the employee has in his 401k:
- $20k, the equivalent fee is 0.41%
- $50k, the equivalent fee is 0.24%
- $120k, the equivalent fee is 0.18%
- $200k, the equivalent fee is 0.16%
- $1M, the equivalent fee is 0.136%
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.