5MF Issue 4: The 401k

The thing I love most about writing 5-Minute Fintech is that I usually find I’m missing something quite basic about a topic I think I understand. This week was no exception.

The thing I love most about writing 5-Minute Fintech is that I usually find I’m missing something quite basic about a topic I think I understand. This week was no exception.

For starters, I learned that the concept of retirement itself is relatively new.

A Brief History of Retirement

Before the 18th century, human life expectancy was between 26 and 40 years. If you're gonna die at 40, you're good without a retirement plan.

People began to live longer in the 1700s, and the elderly reached a point where disabilities prevented them from working. The German government, under Otto von Bismark, was the first to institute a policy for retirement in the 19th century.

In the United States, the majority of the elderly didn't retire until after WW2.

In 1940, Ida May Fuller cashed the first US social security check. She received $22.54 (or $416 when adjusted for inflation).

What about pensions? Pensions were definitely much more common in the past but those who received one were in the minority. In 1975, only 25% of people age 65 or older received a pension. Among that group, only 15% of household income came from a pension.

It wasn't until the 1980s that saving for retirement became a goal for the majority of Americans. This blew my mind. Growing up then, saving for retirement felt like something that had been a core American value for generations.

Why should it matter to technologists and entrepreneurs that retirement is a relatively new thing for humans? Because it helps to explain why we suck at planning for it. Morgan Housel puts this well in his excellent book "The Psychology of Money":

"It should surprise no one that many of us are bad at saving and investing for retirement. We’re not crazy. We’re all just newbies."

Housel goes on to make a deeper point about evolutionary psychology:

"Dogs were domesticated 10,000 years ago and still retain some behaviors of their wild ancestors. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated."

We usually approach this from the other direction; we berate people who don't save for their retirement, as if it's something that should be hard-wired into them. It turns out that their brains aren't broken; it's just that this is new human functionality, and we should treat it as such.

A Brief History of the 401k

In 1972, a group of high-earning executives from Kodak asked Congress to help them figure out how to invest a portion of their pre-tax earnings into stocks. Congress eventually obliged, with the Revenue Act of 1978, which inserted an obscure provision into section 401 (sub-section K) of the IRS tax code.

No one took much notice of the provision, until 1981, when a consultant named Ted Benna found it and realized this would be a great way for people to save for retirement. After his employer implemented the first 401k plan, the tool spread across the country like wildfire.

He'd one day regret his invention, but we'll talk more about in a bit.

By the end of 2018, Americans had $27 Trillion in retirement accounts, even though more than half of Americans still had almost nothing saved for the future.

401k Innovation

Now that we have a handle on the past, let's talk about the future. The most interesting startup innovation is taking place at the individual and small business level.

Small business startups

Today, only about half of all small businesses offer a 401k plan, and a slew of startups are competing to make 401ks easier and more inexpensive for small businesses. In the small business space, 300,000 brokers manage a total of 650,000 401k plans...meaning there is almost one broker for every two 401k plans!

Plan administrators have traditionally charged a whole host of mysterious fees, including a percentage of AUM (assets under management). This gets expensive and also kinda ridiculous, since all most of them do to 'manage' 401ks is move money into well-established funds.

Savvy startups are charging a flat monthly fee + an additional amount per employee to make things clearer. They are also doing what FinTech startups do best: take old, cludgy software and turn it into clean, vibrant interfaces (that are frequently purple, for reasons no one understands).

The most interesting startups in the space include Human Interest, Guideline, and ForUsAll.

Personal wealth management

The other well-established approach is to offer automated wealth management services that were formerly only available as consultative services for the extremely wealthy. This category of businesses are referred to as 'robo-advisors'.

The services are generally targeted to customers who want to feel like they are in the driver's seat with their money. They typically aggregate account data, tailor portfolios to risk, perform automatic portfolio rebalancing, and offer a mix of both automated and consultative advice.

This is a space where large firms compete head to head with startups. Institutions like Vanguard and Schwab remain head of surging startups like Betterment and Wealthfront.

Where innovation is missing

In an interview with the Wall Street Journal in 2017, Ted Benna reflected on his career regrets:

“I helped open the door for Wall Street to make even more money than they were already making,” he says. “That is one thing I do regret.”

He went on to say that he doubts that “any system currently in existence” is an effective solution for the vast majority of Americans.

The 'father of the 401k' believes that rising fees and the complexity of plans limit the benefit for people. He also feels that we have become far too dependent on the fluctuations of the stock market.

Startups in this space are looking at ways to make the distribution of 401k plans more efficient, but I suspect that the real innovations may be found in rethinking our entire approach to saving for retirement.



Sandeep: Tell me a bit about the early part of your career.

Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.

Sandeep: What is something you learned during this time that helped you with consulting?

Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.

Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.

Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.

Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an acquisition...consulting skills definitely translate into the corporate environment.

Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.

Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?

Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.

Sandeep: What has stayed the same?

Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not change...it's what I love about consulting.

Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?

Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.

Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?

Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.

Sandeep: Tell us about a business hero of yours that I may not have heard of before.

Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact

Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?

Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.

Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?

Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.

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