A Silicon Valley tech startup is preparing to take aim at traditional 401k plan providers after announcing the completion of a $15.4 million Series B financing round on Aug. 6.
San Francisco-based Human Interest, an online service and tool that helps small businesses and startups set up 401k plans for their employees, says the milestone puts it squarely in expansion mode.
Human Interest CEO Jeff Schneble told 401k Specialist this week that the capital from the Series B will primarily go toward two initiatives:
1) “Product development to continue building out our proprietary in-house recordkeeping, compliance, and robo advising functionality. We feel that we’ve built the most complete, most automated retirement platform in the industry, and will continue to invest in the platform as we scale.”
2) “Distribution initiatives to get our product into tens of thousands of employers, which will allow us to help millions of consumers save for retirement. We have several direct-to-SMB channels, including great web content and word of mouth. We also are working with HR and payroll partners, where we are quickly becoming the default 401k they recommend to their customers.”
Startup story
Human Interest was founded in 2015 as Captain401 at Y Combinator by Roger Lee and Paul Sawaya, after Lee realized how hard it was to set up a 401k for his employees at a previous startup.
Twice a year, Y Combinator invests a small amount of money ($150,000) in a large number of startups. The startups move to Silicon Valley for 3 months, during which Y Combinator works intensively with them to get the company into the best possible shape and refine their pitch to investors.
Today, Human Interest, renamed as such in mid-2018 after an $11 million funding round, has 70 employees and serves as the 401k provider for a relatively modest range of about 35,000 people at about 1,500 businesses across the country. Clients range in size from 30 to 300 employees.
Human Interest says to date 70% of eligible employees participate in the plans they offer, and that percentage goes up to 93% for its employer clients that offer automatic enrollment and an employer match.
The startup’s goals for growth over the next 18 months are rather ambitious.
“We’ve been growing at more than 230% year over year, and are targeting reaching 10,000 employer customers and 400,000+ consumers by the end of 2020,” Schneble says.
The market is out there
What makes Schneble think that kind of exponential growth is possible? The staggering amount of small and medium-sized businesses still don’t offer retirement plans.
“The biggest surprise for me personally has been how big this market is. Half of the U.S. workforce isn’t saving for their retirement, and a third of the workforce doesn’t even have access to an employer-sponsored retirement plan,” he says.
“There are approximately a million businesses in our target segment of 10-300 employees that don’t yet have a retirement plan. The incumbents have talked about bringing retirement plans to smaller companies for decades, yet 75-85% of these companies still don’t have the product,” he adds.
The primary reason for this, Schneble says, is that the incumbents built their products and their businesses around serving very large customers. “We think a new approach is required to bring retirement benefits to the other third of the market. We are using technology to make retirement benefits that are so affordable and easy to use that every business in the U.S. with employees can offer this basic benefit.”
Mark Goines, vice chairman of hybrid digital wealth manager Personal Capital and a Human Interest investor and new board member, notes how employees are increasingly looking at 401k plans as a “must-have” benefit, which has helped spur smaller businesses to offer them.
“Since 401k plans became popular in the 1980s, they have predominantly benefited employees at larger companies. Small employers are now, more than ever, including retirement plans as a part of their core benefits,” Goines says.
About that technology…
Schneble says Human Interest’s primary competitive advantage is its technology and fully digital approach.
“We have built a proprietary platform that includes recordkeeping, compliance, and robo advising. By removing manual steps in the process for setting up and running a 401k, we can make the entire process digital. Our customers can set up their 401k in 10-15 minutes in one online session,” Schneble says.
“Once set up, we put the 401k on autopilot, and automate all of the manual payroll sync and compliance tasks that would normally require hours a month of manual work.”
In a nutshell, Human Interest says its business model enables companies of any size to set up and administer a 401k plan online with an automated investment advising component (via Human Interest Advisors, LLC) to help employees make better financial decisions about their savings.
Pricing transparency
It would be hard for a 401k provider to be more transparent with its pricing than Human Interest, which lists what it charges employers and employees plainly on its website. Schneble says their business model allows them to keep prices low, but they charge enough, as the website says, “so that we don’t cut corners in the administration and security of your 401k.”
Employers clients are charged a base price of $120 a month plus $4 per participating employee (also noting a one-time setup fee of $499 may apply).
By comparison, Guideline, another robo advisor specializing in offering 401ks to small companies (with similarly transparent pricing), charges employer clients a $39 per month base fee plus $8 monthly per participating employee and also has a “Prime” plan with additional features for $99 per month and $8 per employee.
“Our costs are much lower than our competitors because we use software, rather than people, to run our retirement plans. We pass the saving we achieve through technology on to our customers,” Schneble says, referring to more traditional 401k providers rather than fellow robo advisors.
Among other things, Human Interest’s fee covers automated 401k administration, payroll sync and recordkeeping, IRS Form 5500 and plan document preparation and filing, participant disclosures, QDIA, and annual plan notifications, and IRS non-discrimination testing and monitoring.
The flexible plan design includes options such as safe harbor, profit sharing, Roth and traditional 401ks, 403bs, vesting, automatic enrollment and more.
Participating employees are charged 0.50% of their account balance per year plus 0.07% average fund fees, which it compares to 1.89% average fund fees for small 401k plans, per the 401(k) Averages Book, 18thEdition.
Participants can check their balance or change their contributions online at any time, and the company also provides support for loans and hardship withdrawals, free incoming and outgoing qualified rollovers, and ongoing email and phone support.
The investment advising services include:
- Automated investment advising and portfolio rebalancing
- Financial literacy training and resources
- Access to low-cost index funds and 30,000+ fund options from Charles Schwab, Vanguard, BlackRock, Fidelity, etc.
- 3(38) or 3(21) fiduciary status to protect your assets
- Investment advising and fiduciary status are provided through Human Interest Advisors, LLC
A shot at incumbents
Human Interest’s aim to disrupt the 401k provider market doesn’t stop with claims of better tech and lower prices.
In a statement earlier this week announcing the Series B close, Schneble took a shot at industry incumbents they hope to disrupt.
“At Human Interest, we like that we stand out from our industry. We take pride in operating as a fiduciary and putting customers’ best interests first and, unlike other 401k providers, we don’t take kickbacks from any investments we recommend.”
The overarching issue, as Human Interest sees it, is how hard it has traditionally been for small employers to start a retirement plan, and how the industry hasn’t been in any hurry to cater to their needs.
“Survey after survey points out that most Americans are falling short when it comes to saving for retirement. Often, it’s because they’ve had to face problems stemming from the industry, including high, predatory fees, confusing language, and plans that don’t put customers’ best interests first,” Schneble says, pointing to a surge in 401k lawsuits. “For many others, they’re not saving for retirement because they don’t have access to a retirement savings plan through their employer. We aim to change this.”
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