In the early 2000s, as internet companies like Amazon threatened to put brick-and-mortar companies out of business, a group of DC record keepers emerged, making bold predictions, none of which came true. Though valued at $1 billion at one point, Emplanet collapsed, as did GoldK, while ExpertPlan was eventually sold to Ascensus at a modest price. Online 401k, now Ubiquity, which was focused on small plans, not the internet, remains.
Are today’s batch of fintech record keepers viable?
In a recent Retireholics program with industry veteran Charlie Nelson, their conclusion was “absolutely not,” even though these fintechs have collectively raised $1.5 billion. However, their assessment may be biased as some third-party administrators and traditional record keepers not leveraging growing trends are rightly threatened and defensive.
The question is not whether the basic business model is doomed, which it is not. The question is which ones have a viable business model plus the ability to execute.
There are four major fintechs including:
- Human Interest
The other three include:
All four major fintechs responded to interview requests except for Human Interest, which is amid a fund raise. Other than Betterment, which is not a pure record keeper, none are profitable, with costs roughly calculated by multiplying the number of employees by $250,000, putting Human Interest in a precarious position with an estimated 800 employees and a reported $80 million in revenue. However, there have been reports they have reduced headcount recently.
Squarely focused direct to business through payrolls, including Gusto, Intuit and Rippling, as well as CPAs, Guideline is making more of an effort to reach out to advisors. With almost 50,000 plans and $12 billion, they have $100 million in revenue and 350 employees close to breaking even with plenty of cash after raising $344 million.
“You cannot lump all fintech record keepers together,” said Jeff Rosenberger, Guideline’s COO. “Our new plans are growing rapidly, and advisors are now one of our three top priorities.” He noted they raised money when it was cheap, even if not needed, as it allowed them to acquire clients faster.
Though not a pure fintech record keeper focused more on trust and custody direct to consumers as well as competing for smaller RIAs with Schwab and Fidelity, Betterment built a record-keeping system in 2016, eight years after launching. The firm has $40 billion in AUM, 800,000 customers and 600 advisory firms but would not break out its 401(k) business.
Realizing the opportunity to cross-sell to advisors using its wealth platform and enabling advisors to work with smaller account balance participants, Betterment recently switched strategies to focus on distributing 401(k) plans through advisors. It has raised $430 million.
Though Betterment currently does not share data with advisors, which is available on their dashboard for each plan, it claims to not market directly to participants on their record-keeping system.
As the only fintech that began focusing on advisors, Vestwell has a head start but slowed because it did not build its record-keeping system until three years in, relying on third parties like Lincoln Trust. It recently raised another $125 million, bringing its total to $250 million and is reported to have $70 million in revenue and 350 employees.
Unlike competitors, Vestwell has branched out into other lines of business, including state programs (auto IRAs, ABLE & 529 plans) through the Sumday acquisition from BNY Mellon, an investor, as well as student loans through the purchase of Gradifi from Morgan Stanley, a major client along with JP Morgan. It shares data with advisors and, in 2024, will focus on TPAs that work with advisors, retirement income and group plans.
So why should advisors or even the DC industry care?
There are societal forces some incumbent providers and RPAs are unable or unwilling to handle, especially the explosion of small plans and the convergence of wealth, retirement and benefits at work driven by data. It is the proverbial innovator’s dilemma.
It can take years for smaller and start-up plans to be profitable for most traditional providers, especially if they work with TPAs, which is exacerbated when competing with low-cost payroll companies and fintechs. While some RPAs, estimated to be 12,000 by Cerulli, are trying to leverage PEPs to service smaller plans, the other 275,000 wealth advisors are waking up to the opportunities to find new clients within DC plans while defending their current relationships.
Granted, service from low-cost payroll providers and fintechs cannot compare to most traditional providers, especially those using TPAs, but saying their business model is untenable is biased and wrong with all due respect to the irreverent Retireholics and the venerable Charlie Nelson. They serve a growing need and client base, driven by state mandates, SECURE 2.0 tax credits and group plans.
And unlike the internet 401(k) record keepers of the 2000s, whose business model was world dominance through disruption, today’s fintechs are leveraging the explosion of small plans and participants through cleaner, more robust data, infinitely better technology, and AI. And, of course, $1.5 billion in capital.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.