Worlds collide as Goldman Sachs buys Honest Dollar
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21 March 2016
What do Goldman Sachs and a free spirited Texas startup have in common? An interest in automating the small plan retirement business, it turns out. As I’ve pointed out on this blog and in a previous report, employees of small businesses have borne the weight of the high fees charged by 401k plan providers. These fees are embedded within the plans and over the course of a career can amount to tens of thousands of dollars. Millions of American small business workers may earn an honest dollar, but they find it hard to save one. This is the problem Austin based CEO Will Hurley has set out to solve. His platform lets companies offer SEP IRAs (individual retirement accounts that also allow employers to make contributions should they wish) to employees for a modest $10 per month convenience charge. An Alternative to the 401k The user friendly, mobile first Honest Dollar platform fits the needs of creative types and other participants in the gig economy (think Uber), but it also suits employees in more traditional environs, e.g., family businesses. While not a 401k killer (the SEP IRA was designed to serve the self-employed), it is an alternative to the clunky and costly 401k platforms that small company employees have accessed in the past, when indeed they have had access. Most small firms have neither the manpower nor the expertise to operate their own retirement plans. Increasingly, the appeal of Honest Dollar to small employers has centered as much on shielding them from legal risk as on helping employees build savings. Because SEP IRA sponsors take no responsibility for investment selection or oversight, they cannot be held liable for outcomes. Freedom from fiduciary liability has become particularly compelling given recent judgments by the Supreme Court and other levels of the judiciary against plan sponsors, including large firms such as Lockheed and Cigna. Enter the Department of Labor The proposed imposition by the Department of Labor of a uniform fiduciary standard for retirement advice has raised dramatically the stakes for employers. In buying Honest Dollar, Goldman Sachs has decided to get out in front of the changes at hand. These include an increasing reluctance on the part of some advisors (particularly those working on a commission basis) to serve all but the largest retirement accounts, given the associated compliance and legal costs. The Goldman investment in Honest Dollar represents an acceleration of the Wall Street firm’s interest in penetrating the mass affluent market (for example, via its planned launch of a P2P lending platform). The deal should be understood as a low cost, low risk technology play aimed at boosting distribution (in this case, by supplementing the Vanguard ETFs on the platform with Goldman equivalents) and scale, including on a direct to consumer basis. The economics of the small plan retirement business are marginal in the best case. As I note in a recent Wall Street Journal article, it is tough to do deals with thousands of small companies scattered across the country. Insofar as this service can be automated, however, and given the alignment of (low cost and transparent) automated advice with an enhanced fiduciary standard, there appears to be plenty of upside. Look for more acquisitions of automated providers (in both the retirement and taxable investments space) by wealth and asset managers to come.