For nearly the past decade, I have been speaking, writing, and advising businesses about the lack of transparency, excessive and unnecessary fees, and conflicts of interest in the retirement plan industry. For a litany of reasons I have explained, the industry does not operate anywhere close to a free and competitive market, and as a result, retirement plan service providers have continually had participants and employers at their mercy. Finally, however, a new provider has emerged that empowers participants and employers and exposes the industry’s inefficiencies.
This new provider is called Guideline, and it has an interesting story. The founder Kevin Busque had previously co-founded TaskRabbit, an online and mobile marketplace that matches freelance labor with local demand, allowing consumers to find immediate help with everyday tasks, including cleaning, moving, delivery and handyman work. Having trouble finding a high quality affordable retirement plan for his employees, he did what any successful entrepreneur would do to solve a problem. He started his own company.
Guideline provides record keeping, 3(16) administration fiduciary, and 3(38) investment fiduciary services where they streamline the compliance and fund selection process to the point where employers don’t even have to sign the 5500 form, send out participant notices, manage vesting, eligibility, or loan policies, or approve distributions and hardship withdrawals, and participants can simply choose a customized portfolio consisting of low cost index funds based on their answers to a few questions. Guideline uses Benefit Trust Company as a custodian who charges 0.03% of plan assets, which they do not pass on to participants. Their only fees are $8 per month per employee (subject to a minimum of $40 per month) and a one-time $500 set up fee.
What makes Guideline especially interesting is that they currently require employers to pay both their fees and the advisory fees if they choose to use an advisor. Since I have always advocated that employers pay the service provider provider fees, I have no issue with this requirement. In fact, I have often suggested that service provider fees would decrease drastically if there was ever a rule that required them to write a check instead of passing the fees on to participants. The reason is simple: Employers are more sensitive to fees if they have to write a check.
Guideline’s incredibly low fee structure and streamlined process not only enable small employers to afford a retirement plan both in terms of time and money, but they also help give participants a chance to avoid the exorbitant fees (often close to 2%) that they otherwise would have incurred. The Department of Labor provides an example to quantify the effect of just 1% in additional fees:
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.”
To elaborate on just how low Guideline’s fee structure is for small businesses, let’s compare them to Employee Fiduciary, another low cost provider who charges $1,500 for annual record keeping and administration services (up to 30 participants and $30 for each additional participant) and 0.08% of plan assets for custodial services provided by MG Trust Company, not including a $1,000 set-up fee ($500 for start-up plans). According to Guideline co-founder Kevin Busque in this Fireside Chat on May 31, 2018, Guideline handles 4,000 plans (the website states they currently work with 5,500+), $500 million in assets, and $30 million in monthly payroll contributions and has an average plan size of about 12 participants (and an average plan asset size of $125,000) with plans ranging from 2 to 700 participants, so their average annual fee is about $1,152 ($96 * 12) not including a $500 set-up fee. Employee Fiduciary, unlike Guideline, does not provide 3(16) administration or 3(38) investment fiduciary services, so the total service fees would be significantly more if employers were to add those services. Granted, unlike Employee Fiduciary, Guideline does not provide cross-testing services (but they can provide all of the information needed for an actuary or pension consultant to perform cross-testing) nor does it allow for self-directed brokerage accounts, but the segment that Guideline focuses on typically doesn’t require those services and features. Neither company offers defined benefit plans, which are also not typically relevant for small employers.
Guideline’s services also shine light on the futility of just about every retirement plan financial advisor by demonstrating how little value there is to selecting and monitoring a fund line-up, which is the primary reason why advisors get paid – and they almost always base their fee on the size of the account to ensure that it keeps increasing! Here is what Ted Benna, who is commonly referred to as the “father of 401(k)” because he created and gained IRS approval of the first 401(k) savings plan, had to say about 401(k) plan financial advisors:
“The advisors are getting paid each time they go through the process with an employer to help pick funds as if they’re doing an original piece of work. There are more than half a million 401(k) plans, so that’s happened over half a million times. The fund menus aren’t that much different. But advisors are getting paid as if they’re doing an original piece of work. That’s just bizarre, extremely inefficient and much too expensive.
First of all, they need to get away from asset-driven compensation and be paid a fee for service, the same as accountants or attorneys, who don’t get paid a percentage of corporate [client] assets. Their role should shift to helping people focus on how to succeed at retiring successfully, not on investment return. Building a smarter investment mix is pretty much of a commodity now. The focus should be on goals: “I want to retire successful. Help me do that.”
So in effect, Guideline is forcing advisors to actually provide value. First, advisors have to come up with the kind of value proposition that Benna suggests because Guideline has taken over the process of selecting and monitoring plan assets. Second, advisors have to prove to employers that participants actually use their services enough to justify their fees since they can only get paid if employers write a check. To illustrate, I recently had a conversation with an unusually proactive business owner who decided he no longer wanted to pay for the advisor’s 0.35% fee because he didn’t believe the advisor was providing any value. I say “unusually” because most employers don’t even think about eliminating the advisory fee, but rather just accept it as part of the cost. The advisor responded by claiming that his fee was standard throughout the industry – and while he was right, even he couldn’t come up with a single example of value to justify the fee. Unfortunately, few employers have the time, energy, knowledge, and motivation to not only question the advisory fees, but to actually fire the advisor. Now thanks to Guideline’s restriction on participant-generated advisor compensation, employers have no choice but to carefully evaluate the advisory fees in proportion to the value before engaging their services.
Furthermore, even if employers investigate Guideline’s services and decide that Guideline is not the right fit because of services not offered or because they don’t want to cede control of the investment line-up to a 3(38) fiduciary, they will at least begin to understand the ease with which a service provider can develop and monitor a fund line-up at a tiny fraction of the cost of a typical financial advisor. For that reason, they might begin to question why they are continuing to unnecessarily use their participants’ retirement savings to drastically overpay their advisor for a commoditized service, especially when the advisor is often taking a more limited level of fiduciary responsibility than a 3(38) fiduciary or none at all.
In summary, Guideline is a great provider for any small business that has basic needs not including cross-testing, self-directed brokerage accounts, or defined benefit plans, appreciates the value of technology, and truly cares about providing the best possible retirement plan benefits to its employees. It acts a disruptor because it shifts the paradigm through which we view retirement plans from an opaque model where retirement plan service providers claim to help participants save for retirement and somehow make money in ways they don’t understand to a more honest, transparent, efficient, and cost-effective model that helps participants use technology to their advantage. It acts as an enabler because it frees participants from the shackles of an outdated retirement system that aims primarily to enrich providers at their expense.