Founder here, happy to take any qs.
We started this because we were sick of percent based fees eroding our investment growth. We also wanted access to more sophisticated investment options which until now have not been available via high end personal wealth managers.
Great to see more competition in this space! (Aside: Can you comment on why this is happening now? ForUsAll, Captain401k, Betterment's 401k, now you, etc.)
Who is your third-party custodian? Wealthfront uses Apex Clearing and makes this explicit.
What ETFs do you allow employees to choose from? Again, others (e.g. Captain 401k) make this explicit.
Can employees choose their options in a fine grained manner, or does everyone need to opt-in to your rebalancing and changing of ETF options?
Hey, thanks for the questions! I'm Rikin, also a founder.
We actually have relationships with several custodians - depending on the investment options the company wants to make available in the plan.
We don't explicitly list the ETFs because we're not tied to a single fund family (e.g. Vanguard). We pick the best of breed funds for each asset class quarterly - our portfolios currently have ETFs from iShares, Vanguard, Schwabb and PowerShares. We can accommodate requests if employees are after something in particular.
And finally, yes, employees can build custom portfolios. Investment flexibility was one of drivers of us starting this, but we make our portfolios/rebalancing the default to encourage participation from inexperienced employees. We don't have any restrictions on the ETFs/funds or even single-stocks that can be added - but we are careful not to unlock funds that aren't risk appropriate.
You state the problem space clearly -- many employees don't choose to take advantage of tax-deferred retirement plans.
To whom do you have access for investment? DFA has a great portfolio of so-called "unmanaged" index funds. They have a low burden, much of it not front-loaded. And they've been around a long time. There are other similar funds.
How do you avoid the Zenefits craziness as you grow?
re investments, we can include several fund families, including Vanguard and DFA. However most customers prefer our Octave portfolios which are built using best of breed funds from multiple providers, using a sophisticated optimization process.
re craziness, our team already has tons of experience managing billions of dollars at scale. I wrote a large part of the portfolio management system that manages BlackRock's iShares, and my cofounder was responsible for trading $6B/day of flow for large pension funds.
I'm not familiar with the US, but in the UK, generally pension contributions seem like a total scam to me.
As an individual, there is no possible reason why I would want my money to sit in a retirement fund over just having it now.
I am perfectly capable of investing it as I please, in housing, in stocks, in gold, in starting a business, without having it artificially withheld from me.
There seems to be this idea that I'd just be spending it on booze and fags or something. Individuals generally don't waste all of their money unless they feel saving is hopeless.
Pension funds are an arbitrary restriction on that.
I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement.
Pension contributions are restricted because they are tax-deferred. You avoid paying income tax on the money you put in the pension. That money will also grow tax free, but you will pay normal income tax on it again when you take it out. The age limits on withdrawals are to incentivize long-term savings, I suppose. It's one way the government can incentivize savings, there definitely could be other ways.
If you want to invest your after-tax earnings, you can do that however you please (including investing inside of a tax-free ISA).
I can see the value of a tax deferred savings plan but in the US your employer picks a 401k administrator who then charges fees and gives you a limited selection of investment choices.
This is the same nonsense as employer-based health insurance in the US. Your employer picks or gives you limited choices for a plan.
Although the employee's future is at stake he has no input in these choices.
In the US, the biggest advantage is the tax shelter built into both 401(k)s and IRAs. You contribute pre-tax dollars to a "Traditional" account, and pay ordinary income-tax on qualifying withdrawals. You contribute post-tax dollars to a "Roth" account but your investments grow tax-free (much like an ISA in the UK). The tax benefits of each account are equivalant, all else being equal.
For example: if you contribute $8k/year pre-tax (or $6k post-tax), to an account with 8% annual returns over 30 years, and are a 25% federal tax payer, a tax-sheltered account would leave you $167k better off, than a non-tax sheltered account.
These tax shelters can be an incentive to save for retirement, and hopefully avoid missing out on compounded growth.
Yes, I know that there exists a tax deferral. Sometimes employers even match funds.
The statement I am making is that this seems like a complete scam by the Government - forcing you to perform suboptimal manoeuvres by withholding your cash otherwise.
Is it worth participating to reduce taxes? Possibly.
Does it outrage me that I'm treated like a child in this respect? Certainly.
(Why age 55? What if I want to retire at 50? What if I'd rather take a year out now and work 55-56? What if I want to leave the country? What if tax rates change?)
That's a good question actually. In Canada you can withdraw from your RRSP early if you want, but you get hit with something like a 25% "don't do that" fee. What's the reason for this lock-in? I can't see one other than to try to encourage you to keep your money in the plan for the long run.
>I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement.
I doubt it. Would you have predicted the rise of HelloFresh, Snapchat, Uber, 20 years ago? Really doubt it.
Besides, not all people in the world (read: everyone but you) is this "smart", especially about delayed gratification. Hell! I recently wrote a small paper and I found some striking results that almost 40% of Americans start saving for their pensions after 40! That is way way way too late. I studied actuarial sciences and around 80% of your final retirement savings is due to accrued interest. It's huge.
In Canada you can self-manage your RRSP (a tax-defferal plan much like 401k) and choose which funds or stocks to buy, etc.
But when I was getting matching RRSP contributions from an employer (and I assume there are some kind of government tax breaks related to this), I didn't get any choice as to the RRSP fund manager. (Which didn't stop me from moving it to my self-managed RRSP account years later after leaving said employer.)
For 401k, I'd infer the reason is regulatory: employer-matched 401k contribs have to go via a certified plan manager.
For what its worth, the whole idea of giving you all, a team none of my employees know discretion over their 401k seems like a terrible idea. You had my interest until that part. Maybe others are interested but as a CFA Chartholder and someone who manages institutional money to me discretion is often used at precisely the wrong time no matter who is doing it (especially worse when its not your own money or dont have skin in the game).
It is interesting though, dont get me wrong. These type of services the country needs more of as the current model is more than broken.
Thanks for the feedback. To clarify, we are not an active investment manager. We follow a strict investment process and aren’t making changes on a regular basis. Our portfolios have a long term investment objective and are matched to each employee’s personal risk profile. We do not try to time the market. The IRS/DoL requires plan sponsors to monitor plan investments, so we take discretion over this to reduce the burden on the employer and reduce their liability.
Our team used to manage institutional money at the largest asset managers, and includes a CFA charter holder. Our portfolios are built using the same quantitative methods used by institutions, and seek efficient, low cost diversification.
Only slightly related but why is 401k chosen by the employer in the US? In Australia your Superannuation (basically the same thing) is chosen and controlled by you.
After moving to the US it seems to be that each employer you have will give you a 401k plan with a different company and any time you leave you should roll it over to either another 401k or an IRA or something.
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[ 4.3 ms ] story [ 66.0 ms ] threadWho is your third-party custodian? Wealthfront uses Apex Clearing and makes this explicit.
What ETFs do you allow employees to choose from? Again, others (e.g. Captain 401k) make this explicit.
Can employees choose their options in a fine grained manner, or does everyone need to opt-in to your rebalancing and changing of ETF options?
We actually have relationships with several custodians - depending on the investment options the company wants to make available in the plan.
We don't explicitly list the ETFs because we're not tied to a single fund family (e.g. Vanguard). We pick the best of breed funds for each asset class quarterly - our portfolios currently have ETFs from iShares, Vanguard, Schwabb and PowerShares. We can accommodate requests if employees are after something in particular.
And finally, yes, employees can build custom portfolios. Investment flexibility was one of drivers of us starting this, but we make our portfolios/rebalancing the default to encourage participation from inexperienced employees. We don't have any restrictions on the ETFs/funds or even single-stocks that can be added - but we are careful not to unlock funds that aren't risk appropriate.
To whom do you have access for investment? DFA has a great portfolio of so-called "unmanaged" index funds. They have a low burden, much of it not front-loaded. And they've been around a long time. There are other similar funds.
How do you avoid the Zenefits craziness as you grow?
re craziness, our team already has tons of experience managing billions of dollars at scale. I wrote a large part of the portfolio management system that manages BlackRock's iShares, and my cofounder was responsible for trading $6B/day of flow for large pension funds.
It looks to me like a direct subsidy to the financial sector and in addition employers have the burden of choosing a plan manager.
As an individual, there is no possible reason why I would want my money to sit in a retirement fund over just having it now.
I am perfectly capable of investing it as I please, in housing, in stocks, in gold, in starting a business, without having it artificially withheld from me.
There seems to be this idea that I'd just be spending it on booze and fags or something. Individuals generally don't waste all of their money unless they feel saving is hopeless.
Pension funds are an arbitrary restriction on that.
I can much more readily leverage my intellectual and social capital if I have cash in hand and that will almost certainly result in a better outcome at retirement.
Pension contributions are restricted because they are tax-deferred. You avoid paying income tax on the money you put in the pension. That money will also grow tax free, but you will pay normal income tax on it again when you take it out. The age limits on withdrawals are to incentivize long-term savings, I suppose. It's one way the government can incentivize savings, there definitely could be other ways.
If you want to invest your after-tax earnings, you can do that however you please (including investing inside of a tax-free ISA).
This is the same nonsense as employer-based health insurance in the US. Your employer picks or gives you limited choices for a plan.
Although the employee's future is at stake he has no input in these choices.
For example: if you contribute $8k/year pre-tax (or $6k post-tax), to an account with 8% annual returns over 30 years, and are a 25% federal tax payer, a tax-sheltered account would leave you $167k better off, than a non-tax sheltered account.
These tax shelters can be an incentive to save for retirement, and hopefully avoid missing out on compounded growth.
Yes, I know that there exists a tax deferral. Sometimes employers even match funds.
The statement I am making is that this seems like a complete scam by the Government - forcing you to perform suboptimal manoeuvres by withholding your cash otherwise.
Is it worth participating to reduce taxes? Possibly.
Does it outrage me that I'm treated like a child in this respect? Certainly.
(Why age 55? What if I want to retire at 50? What if I'd rather take a year out now and work 55-56? What if I want to leave the country? What if tax rates change?)
I doubt it. Would you have predicted the rise of HelloFresh, Snapchat, Uber, 20 years ago? Really doubt it.
Besides, not all people in the world (read: everyone but you) is this "smart", especially about delayed gratification. Hell! I recently wrote a small paper and I found some striking results that almost 40% of Americans start saving for their pensions after 40! That is way way way too late. I studied actuarial sciences and around 80% of your final retirement savings is due to accrued interest. It's huge.
But when I was getting matching RRSP contributions from an employer (and I assume there are some kind of government tax breaks related to this), I didn't get any choice as to the RRSP fund manager. (Which didn't stop me from moving it to my self-managed RRSP account years later after leaving said employer.)
For 401k, I'd infer the reason is regulatory: employer-matched 401k contribs have to go via a certified plan manager.
It is interesting though, dont get me wrong. These type of services the country needs more of as the current model is more than broken.
Our team used to manage institutional money at the largest asset managers, and includes a CFA charter holder. Our portfolios are built using the same quantitative methods used by institutions, and seek efficient, low cost diversification.
After moving to the US it seems to be that each employer you have will give you a 401k plan with a different company and any time you leave you should roll it over to either another 401k or an IRA or something.
Is it just me or does this make no sense?