Goldman Sachs seems to think it’s time to retire the 401(k).
On Monday, Goldman (GS) announced it was acquiring Honest Dollar, a company that provides retirement savings plans for small and mid-size businesses. Goldman says the acquisition is part of its continuing effort to boost its asset management business, which is generally considered lower risk than investment banking or trading.
Honest Dollar calls itself a technology company. It provides a lower-cost, easier way to set up and manage employee retirement plans. Small businesses often say the cost of setting up an employee savings plan is prohibitive. Honest Dollar offers individual retirement plans with mutual funds managed by Vanguard for $8 a month, per employee. That works out to a fee of about 0.1% a year, roughly a tenth of the usual 1% of assets that 401(k) plans often charge.
Goldman didn’t disclose how much it paid to acquire the company. Honest Dollar launched a year ago, with $3 million in funding in a seed round.
But what is more notable about Honest Dollar, which wants to be a big player in the retirement savings business, is that it doesn’t offer 401(k) plans.
Few have tried to challenge the dominance of the 401(k). Americans had $4.6 trillion stashed away in 401(k) plans at the end of 2014, the latest year the numbers are available, up from $1.5 trillion just three years before. But Honest Dollar is gunning for a fight with this behemoth. The company has a section on its website titled, “What makes Honest Dollar better than a 401(k)?” It also has a calculator showing how much money employers can save using Honest’s savings plan rather than a 401(k).
Honest Dollar sets up IRA accounts. IRA accounts are generally used by people who are setting up a retirement account on their own. But Honest Dollar says its software makes it manageable for employers to use IRA accounts as the basis for their savings accounts and that, in turn, helps lower fees and makes the plans more transparent. Honest Dollar’s website proclaims, “No commissions means no shadiness.”
There’s enough backlash, particularly in Washington, against 401(k)s for Honest Dollar, and now Goldman, to feed on. The Obama administration’s recent efforts to rewrite the brokerage industry’s fiduciary standards rules is in part motivated by a desire to eliminate the kind of conflicts of interest that, proponents believe, result in higher fees for 401(k) plans.
But for now, Honest Dollar CEO Will Hurley says he isn’t focused on toppling the 401(k). He says he is first focused on winning over small businesses, where the fees to run a 401(k) can be the highest. In fact, only a small fraction of companies with fewer than 100 employees offer retirement savings plans. That’s partly because of the cost, but also because of the complexity of managing such plans. Honest Dollar is also looking to develop retirement plans for sharing economy workers. It currently offers a retirement savings plan for drivers of ride-sharing company Lyft.
In all, Hurley says there are 45 million workers in the United States who don’t have access to a 401(k) plan. Hurley says that’s a big enough market to focus on for now. “It’s not an underserved market,” says Hurley. “It’s unserved.”
But eventually, Hurley says, the company will likely target larger companies. And though he has no plans to do it today, Hurley says he won’t rule out eventually offering a 401(k) option, which he says can be a sensible for large companies. Hurley says his company has had no problem raising money, but it thought hooking up with Goldman was the quickest way to grow. “We’re growing this business as large as it can be,” he says.
