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October 4 2019 - San Francisco, CA

Guideline: Kevin Busque & Michael Tannenbaum

Chris R:
Hello and welcome to another episode of Brex in the Black. We've got our normal guests, Michael Tannenbaum, the CFO of Brex, and a special outside guest, CEO and cofounder of Guideline. Kevin why don't you just tell us about short summary on Guideline and then we can get great through.
Kevin Busque:
Sure. Guideline is actually a retirement platform. 401(k) is our very first product, first entry into the retirement space, happens to be a necessity to be employer sponsored. That's why we have a partnership with Brex. All of that savings' vehicle needs to be compensation deferral, so it has to come from your paycheck, hence the reason it's employer sponsored. But Guideline itself is a larger retirement platform, we're just getting ready to launch our IRA products, our IRAs in the fall to complete the suite. Then soon after that we'll have an HSA product as well. But we handle pretty much anything that is taxed advantaged, and that's our core technology. Anything that comes from a paycheck or has pretax or post tax advantages to it, we can handle that.
Chris R:
Why do you constrain it to just tax advantaged?
Kevin Busque:
Yeah, so there's a core piece of our technology is called a record keeper, and that's quite technical, but it has to do with keeping track of all the things that the IRS requires you to keep track of. Including all the regulations, different types of notices to clients and all of that stuff. We have our own record keeper that we developed as a technology company to be able to offer this in a streamlined and efficient manner per person instead of the AUM based.
Michael Tannenbaum:
We're using a lot of acronyms just to make sure the audience is aware, so we've got 401(k), IRA, AUM.
Chris R:
HSA.
Michael Tannenbaum:
HSA. It's getting hot in here guys.
Kevin Busque:
You said keep it technical, we're keeping it technical. 401(k) is.
Michael Tannenbaum:
The audience we see are those people.
Chris R:
Perfect.
Kevin Busque:
401(k) is actually just a section of the IRS tax code section, 401(k). That is a way that the government allows you to defer portions of your compensation as contributions into a savings' vehicle, known as 401(k). IRAs, just the Individual Retirement Account quite different than a 401(k) doesn't have to be necessarily sponsored by an employer so you can open one individually. HSA is a Health Savings Account. This allows you to pay for medical expenses but also allows you to invest in a tax advantaged way. If you don't use it for healthcare, you can actually invest that long term and use it down the line.
Michael Tannenbaum:
What I'm hearing is Guideline offers a bunch of different products. Some are retirement oriented, HSA sounds like it's not, that your core differentiator is that you deal with tax advantaged.
Kevin Busque:
Right?
Michael Tannenbaum:
Tax advantaged sounds good because advantage is a positive word, what does it actually mean?
Kevin Busque:
Right? Just to clarify that a little bit. HSA on the back half of it. If you're not spending the money monthly that you have put away or that your company has given you, you can actually invest that. We pride ourselves on the investment side of it.
Michael Tannenbaum:
Okay, sure, we'll come to that. But tell us about tax advantage.
Kevin Busque:
Yeah. Tax advantage is a way for you to put money into something pretax, meaning you're not taxed on it. Say you make 300 bucks, you could put away $150 of that and not pay taxes on that money before you invest it. It then gets to grow tax free and then you're taxed on it when you take it out and that's the difference between a traditional IRA or a traditional 401(k) and a Roth IRA or Roth 401(k). This is the after-tax version.
Michael Tannenbaum:
Roth is a last name of a lot of people I grew up with. How did they get it to sit with an IRA?
Kevin Busque:
Great question. I don't know how Roth got its name. I could find out for you for sure. But what that all that means is it's really just a feature of the larger tax vehicles, so have a 401(k) or an IRA.
Michael Tannenbaum:
Tax advantage just means that there's some tax benefit to the structure because you paid taxes later, presumably when you have lower taxes. Because you're going to make good money when you're retired, the tax rate's lower.
Kevin Busque:
In each person's situation is different. But you could say that, hey, maybe I'm making more money now, or I plan to make more money later, so you can contribute to a Roth potentially now when you're in a lower tax bracket or you can contribute in traditional one.
Michael Tannenbaum:
Totally. Yeah.
Chris R:
Of all of these retirement options, what makes sense for the employees of a given business?
Kevin Busque:
What makes sense for an employee? I think really getting started early and that's why we're so focused on the small businesses in the US. There's 5.8 million small businesses in US, 90% of them don't have access to any sort of retirement plan or account from their employer. That's a huge gap there we have talked a lot about the retirement crisis.
Michael Tannenbaum:
I just want to clarify, there's 5.8 million people with small businesses?
Kevin Busque:
Small businesses.
Michael Tannenbaum:
90% of jump off.
Kevin Busque:
Correct. Absolutely.
Michael Tannenbaum:
Cool.
Chris R:
Do they offer some kind of equivalent retirement product?
Kevin Busque:
Yes. You can generally get an IRA on your own, but there's a forcing function to that. Right?
Chris R:
Out of most people it could be.
Kevin Busque:
Actually the stat is, it's less than 2% of all US citizens have a contribution in their tax return for an IRA. People don't save in IRAs, people roll over assets from 401(k)s to IRAs.
Chris R:
Interesting.
Michael Tannenbaum:
Then you guys, I've seen your marketing, a lot of startup focused marketing. Reminds me of a different company I know, and I was curious, how do you get people, young people that tend to work at startups, how do you get them to care about retirement?
Kevin Busque:
Yeah, it's actually, I would say that it's not too much of a concern. 401(k) is the second most requested benefit next to health care. People are already thinking about it, millennials actually do like to save contrary to what is out there in the press. It's the fact that they don't know how to do it appropriately or that there's no function, no forcing function. We have a lot of tailwinds at Guideline, there's state programs, there's state mandates that companies have to start offering some level of retirement plan. There's one called CalSavers here in California. Rather than take that plan, it's just government issued essentially, you can get a plan like Guideline and it's quite a different offering.
Michael Tannenbaum:
Great.
Chris R:
What would be the distinction between those two things? I haven't heard of CalSavers.
Kevin Busque:
Yeah, so CalSavers is generally an IRA, most likely a Roth IRA and it's technically sponsored by the employer, but it's outside of ERISA. It has some advantages too of coming from the state.
Chris R:
What is ERISA?
Kevin Busque:
ERISA is essentially the regulation that dictates what is fair for the department of labor. There's a lot where, probably talk about compliance testing, there's a lot to do inside of a 401(k) around compliance testing. Making sure the benefit is the same for highly compensated HDEs employees versus non highly compensated employees and ERISA is essentially the regulation around all of that.
Chris R:
I got that actually gets to our next question, which is if you didn't have Guideline, what would the CFO or financial operator have to decide when you want to give an employee a 401(k)?
Kevin Busque:
There's a fair amount of decisions that you'd have to make if you weren't using a turnkey solution like Guideline. One would be you need to pick a plan administrator, so that's what we call the 316. That is somebody who does payroll contributions, all of those sorts of nuts and bolts of offering a 401(k). Then you also need to pick the investment manager, that is the 338 fiduciary, the person that is selecting the funds that are appropriate for your participants as a whole. You need to select a record keeper, you need to do compliance testing, you need to do tax filing, also known as the 5,500 all of those things. You would have to contract separately for those services if you didn't have a bundled solution like Guideline.
Chris R:
Are there many fiduciary responsibilities that come for that or just?
Kevin Busque:
Absolutely, so there's quite a bit, there's a ton of lawsuits happening right now about the fiduciary aspects of that. There's multiple ways that you can get caught up in regulatory issues. One is in that investment management, there's one of with fees and making sure that you're negotiating the fees. You have to review your menus, your fund menu selection annually. You have to make sure you do all of that stuff to keep the company out of a potential liable liabilities there.
Chris R:
One other thing is, so what are safe harbor plans?
Kevin Busque:
Yes. Safe harbor plans allow you a special way and that the IRS designates if you as the employer decide that you want to offer a safe harbor plan, that is really to the benefit of your participants, your employees, meaning you have a high level of profit sharing or matching. You can qualify your entire plan as what's called a safe harbor plan and that allows you to essentially skip non-discrimination testing, which is the compliance aspect of ERISA, the department of labor. Making sure that the benefit is being offered to all employees, not just the highly compensated ones.
Chris R:
Just to summarize everything so far, Guideline is essentially for tax advantaged retirement accounts or tax advantaged structures. For retirement accounts, that mainly looks like 401(k), which is the standard created by your employer. You coordinate with the employer to do that. Another option for an individual would be an IRA?
Kevin Busque:
Correct.
Chris R:
Which would also be tax advantaged, or a Roth IRA for when your tax advantaged later down the line.
Kevin Busque:
Yeah.
Chris R:
Are there any other, and then the HSA for health spending? Two questions. One is one, what are the restrictions look like for how you can invest the money while it's sitting in the accounts?
Kevin Busque:
Great question. I'll talk about Guideline specifically. There are other more custom options for IRA accounts, but typically in a 401(k) it's loaded with mutual funds or actively managed funds. A lot of those funds come with additional fees or have high expense ratios. Guideline does it quite a bit differently, so we're actually a certified global advisor for 401(k). We're actually the first one in the country to do that. What we do is ask a series of questions that gets to suitability. Is this portfolio that we're going to recommend to you suitable for you, your risk, your age, what we call, retirement time horizon, essentially how long you have left before you actually want to retire? Those options are controlled by the fund menu, which we are the fiduciary of, so we have the 338 on every 401(k) that we offer. There's about 40 different funds in there, largely Vanguard, largely DFA. We use those funds based on your suitability to construct a portfolio, hence the global portion of it that is suitable for you. We do it in such a way that we keep those fees really tiny.
Kevin Busque:
For example, a traditional target date fund, TDF fund from Vanguard, you'd be paying approximately 15 to 17 basis points. Probably the best in the industry. If you took equivalent Guideline portfolio, you'd be paying less than half of that. Five to seven basis points.
Chris R:
That's just because you have a deal with.
Kevin Busque:
No actually quite the opposite. It's not that we have a deal with Vanguard or DFA, it's what we've done is deconstructed a target date fund and just used the underlying funds in an allocation that's appropriate for that individual investor. We take out the middleman of who's managing those funds in a target date fund.
Chris R:
Then Guideline also takes a percentage of that or?.
Kevin Busque:
Yeah, so that's the other thing that's completely different about Guideline. We are largely a software company, we charge just like Slack.
Chris R:
Just a substantial.
Kevin Busque:
If you use the benefit, we charge you $8 per month. If you don't use it, we're not charging for it. You can offer it to a hundred people, a person company, and if 80 of them use it, we charge you per 80. Which is completely different than the industry and legacy plans where they charge you based on assets. This is largely why small businesses have never had access to 401(k). It's just too expensive.
Chris R:
It's just too expensive.
Kevin Busque:
Meaning they charge you these incredible upfront costs to start it and then they charge you annual fees because you don't have any assets for them to monetize. There's really no incentive for them to even offer you a plan. Vanguard's not knocking down your door, Fidelity is not knocking down your door when your six to 10 people are trying to get to zero assets under management. We don't charge anything to the participant ever and that is if you're in the plan, and you're actively employed, you're not paying us anything. Your employer's paying us our fee in your money is fee free and free to grow.
Chris R:
Interesting. Second thing is, is there any reason for an employer to offer an IRA versus a 401(k)? Or for an employee to prefer an IRA over a 401(k)?
Kevin Busque:
Not really. If you're being offered it from your employer in the 401(k) specifically and a Guideline one, your employer's paying for your retirement, so you're not paying any fees so put your money in there. If you don't have access to a 401(k) or there's not a match or something like that, you really need to start looking at the expense ratios. Your fee schedule is where they try to hide all the asset based fees. It may be better for you to not participate in a 401(k) depending on that 401(k) over an IRA. There are differences as well as contribution limits, the contribution limit for an IRA is pretty small, $5000 to $6,000 I forget the exact, the number on the IRA, but on a 401(k) it's $19,000 so you can contribute much more in a 401(k).
Michael Tannenbaum:
You can contribute and still get the advantage of writing it off of your tax bill.
Kevin Busque:
Correct? Yeah.
Michael Tannenbaum:
It lowers your AGI, your adjusted gross income.
Kevin Busque:
Exactly. There's a lot of different advantages for the 401(k) it lowers who payroll taxes, all sorts of things.
Michael Tannenbaum:
Does it lower the employer payroll taxes, or it lowers the personal?
Kevin Busque:
Employer. Yeah, and it lowers the employer payroll taxes.
Michael Tannenbaum:
In person, they're only is employer payroll taxes.
Kevin Busque:
Right.
Michael Tannenbaum:
The message for the audience is 401(k)'s are valued by employees, people want them. They're complicated and if you don't hire somebody to help you manage their regulators, let's still sure you pay attention. It seems like you want to make sure that you're giving your employees a good deal.
Kevin Busque:
Yeah, absolutely, and you can be held liable if it's not a good deal, and you're not taking that into account.
Michael Tannenbaum:
Any other takeaways we should do, Chris?
Chris R:
Just anything else that's often overlooked or got wrong by people when they're looking at tax advantage structures?
Kevin Busque:
Yeah, compliance testing is the big one, that shouldn't be taken lightly. We do compliance testing quite a bit differently. We actually run it every time payroll is run, and we have a predictive algorithm on it.
Chris R:
What's the standard waiver and what do you actually do?
Kevin Busque:
Once a year and it's just a giant surprise. If you guys had participated in a 401(k) previously in your NHCE, a highly compensated employee, you probably get a cheque back at the end of the year. That is because somebody didn't allocate, didn't look at the plan correctly, as well as getting people to save more that aren't NHCE. there's a ratio that you have to, we will notify you ahead of time so people can plan for that event. You can see when you come out of compliance or when you fail a test on the Guideline platform as opposed to just annually at the end of the year.
Chris R:
Michael, anything else or?
Michael Tannenbaum:
No, I think that it's definitely something that 401(k), it kind of exists in that world of, in between HR and finance. Seems scary, lot of acronyms as we've covered. I'm glad that you've helped clarify and really bring to light a good product, so thank you.
Kevin Busque:
Great. Thanks for having me.
Chris R:
Kevin. Thanks so much.
Kevin Busque:
I appreciate it.
Chris R:
Thank you Michael.
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