A New Era of Retirement

Welcome Shareholders,

Every Sunday, we'll highlight one company to do an in-depth breakdown of their business, financial situation, and whether or not it's a worthy investment opportunity - large or small. In today's edition, we'll look at a startup aiming to transform the retirement benefits landscape for small and medium-sized businesses by leveraging cutting-edge technology and automation to provide accessible, cost-effective solutions.

The retirement benefits landscape has long faced a significant disparity, particularly affecting small businesses. These enterprises, which form the backbone of the economy, often struggle to offer employees the retirement benefits that larger companies provide. This gap exacerbates financial insecurity among workers and hinders smaller firms' competitiveness in attracting and retaining top talent. With limited suitable and affordable alternatives, millions of workers are left without access to employer-sponsored retirement plans. Innovative solutions are urgently needed to bridge this gap, providing accessible, cost-effective, and user-friendly retirement plan options that empower workers and bolster small businesses. Human Interest, a startup leveraging cutting-edge technology and automation, aims to address the unique challenges faced by smaller businesses in offering comprehensive retirement benefits. Through its innovative approach, the company seeks to promote financial security and create a more inclusive retirement landscape for all workers.

Little Guys Left Behind

The retirement benefits landscape has long been marked by a glaring disparity, particularly when it comes to small businesses. Although these enterprises form the backbone of the economy, many struggle to offer their employees the retirement benefits typically provided by larger companies. This gap not only exacerbates financial insecurity among workers but also hinders the competitiveness of smaller firms in attracting and retaining top talent. Recent data highlight the severity of this issue.

According to a 2022 survey by ShareBuilder 401k, a mere one in four small-business owners offers a 401(k) plan, with cost being a significant deterrent (another estimate shows that fewer than 50% of small businesses with under 50 employees currently sponsor a retirement plan). Moreover, many retirement benefits options in the market remain inaccessible to small businesses, as private sector plans predominantly cater to companies with over 100 employees. The lack of suitable, affordable alternatives for smaller firms has exacerbated the problem.

This issue is further magnified in sectors with high concentrations of hourly workers, such as service and retail. In these industries, access to retirement plans and participation rates can be as low as half or even two-thirds less than those in higher-coverage sectors. As a result, millions of workers find themselves without the financial security provided by employer-sponsored retirement plans. The retirement benefits gap in the small business landscape underscores the urgent need for innovative solutions that address the challenges faced by these enterprises.

By providing accessible, cost-effective, and user-friendly retirement plan options, the industry can bridge this gap and empower millions of workers to secure their financial futures while bolstering the competitiveness of small businesses in the market. As the retirement benefits gap in the small business landscape continues to widen, startups like Human Interest aims to bridge this gap by leveraging cutting-edge technology and automation. By addressing the specific pain points that have historically prevented smaller businesses from offering comprehensive retirement benefits, Human Interest plans to redefine the retirement planing experience to empower millions of workers.

Pioneering Pensions

Established in 2015 by Roger Lee and Paul Sawaya, San Francisco-based Human Interest is determined to broaden access to high-quality, cost-effective 401(k) plans for small and medium-sized businesses (SMEs). The founders identified a critical gap in the retirement savings landscape, with millions of workers at smaller firms lacking access to employer-sponsored retirement plans. The driving force behind Human Interest is the desire to confront the widespread issue of financial insecurity among American workers.

The founders recognized that smaller businesses often find it difficult to offer comprehensive retirement benefits due to the prohibitive costs and administrative complexities associated with traditional 401(k) plans. By harnessing advanced technology and automation, Human Interest simplifies plan administration and management, making it more affordable and accessible to businesses across the spectrum.

One critical area where they saw the need for change was in the onboarding process for employees. Traditional providers often imposed a 20-day waiting period before new employees could start contributing to their retirement plans. The founders envisioned a system that allowed workers to begin saving from day one, streamlining the process and eliminating unnecessary delays. In their view, the ideal 401(k) plan should be immediately accessible as soon as a worker starts a job, emphasizing the importance of making retirement savings an integral part of the employment experience.

At its essence, Human Interest aims to empower employees to secure their financial futures. The company's platform provides a diverse range of low-cost investment options, enabling workers to make well-informed decisions about their retirement savings. Furthermore, by concentrating on the underserved SME market, Human Interest wants to level the playing field, bridging the gap compared to larger organisations.

Business Model

Human Interest's business model is built upon a foundation of competitive pricing and strategic integrations, positioning the company to effectively address the retirement benefits gap faced by small and medium-sized businesses. The company charges employers a monthly administrative fee ranging from $120 to $180, in addition to a per-employee fee of $4 to $8, depending on the level of services selected. Workers pay a 0.50% fee for portfolio management and an average of 0.07% for investment fees.

A key component of Human Interest's growth strategy is its integration with payroll providers. By incorporating its 401(k) offering into the infrastructure of numerous companies serving the vast U.S. service industry, the startup ensures its retirement plan is easily accessible to a wide range of businesses. Human Interest primarily receives referrals from its partners, which include payroll providers, financial advisors, banks, and credit unions. This approach enables the company to reach a broader audience and offer its innovative retirement solution to those who need it most.

The company has successfully integrated with over 400 payroll providers to streamline the process for businesses, eliminating the need for cumbersome manual tasks such as managing large Excel spreadsheets. Human Interest's efficient system has led to a significant uptick in enrollment among hourly workers, who can now easily access and manage their retirement plans.

Drawing on experience from the telecom industry, Human Interest's leadership understands the power of partnering with the right people and offering services that outperform and cost less than entrenched systems. By focusing on partnerships with payroll providers, CPAs, brokers, and other key stakeholders, the company aims to foster conversations with potential plan sponsors and tap into the massive market opportunity that spans trillions of dollars.

SECURE 2.0

2022 marked a significant turning point for Human Interest, as the company emerged as one of the primary beneficiaries of the SECURE 2.0 Act. This critical legislation aimed to address the retirement savings gap in the United States and bolster the retirement benefits ecosystem, particularly for small businesses. The original SECURE (Setting Every Community Up for Retirement Enhancement) Act, signed into law on December 20, 2019, introduced several much-needed changes to the country's retirement system. However, it wasn't a comprehensive solution to America's retirement crisis. This gap was addressed in 2022, when both the House and Senate considered various pieces of retirement plan legislation, ultimately incorporating SECURE 2.0 into the 2023 Consolidated Appropriations Act, also known as the Omnibus Bill. Signed into law by President Joe Biden on December 29, 2022, the SECURE 2.0 Act introduced over 90 new retirement plan provisions, marking a substantial step forward in tackling the retirement savings gap.

Small businesses stand to benefit significantly from the SECURE 2.0 Act, receiving increased support for the costs associated with offering retirement plans. The legislation doubles the small-business startup credit, covering 100% of administrative costs, up from 50%, with a cap of $5,000. Additionally, beginning in 2025, small businesses will be required to automatically enroll employees in 401(k) or 403(b) retirement plans, with a contribution rate between 3% and 10%. The SECURE 2.0 Act also seeks to raise the current 401(k) contribution limit from $19,500 to $26,000, further encouraging retirement savings and helping Americans build a more substantial nest egg (businesses less than three years old or those employing 10 or fewer workers are still exempt). The new provisions also mandate businesses to extend retirement plan benefits to part-time employees with at least two years of service.

As the SECURE 2.0 Act ushers in a new era of retirement planning, Human Interest stands poised to capitalize on the opportunities presented by this landmark legislation. The company's commitment to providing accessible, cost-effective, and user-friendly retirement plan options for small and medium-sized businesses aligns perfectly with the Act's objectives, making it an ideal solution for employers seeking to navigate the new regulatory landscape. The SECURE 2.0 Act's enhanced tax credits will likely make it more attractive for these employers to offer retirement benefits, which in turn may drive further adoption of Human Interest's 401(k) offering. Additionally, the Act's mandate for automatic enrollment in retirement plans and the extension of benefits to part-time employees will likely expand Human Interest's target market.

As more businesses look to comply with these new requirements, the company's streamlined and integrated solutions will become increasingly attractive to employers seeking a hassle-free way to provide retirement benefits. As a 3(16) fiduciary, Human Interest helps to administer the plan and ensure compliance with ERISA guidelines. This added value proposition allows the company to differentiate itself in the market, attract more clients, and further establish its position as a leading provider of retirement plan solutions. By aligning with the Act's objectives and leveraging its competitive advantages, Human Interest is well-positioned to benefit from the growing demand for accessible, cost-effective retirement plans, ultimately helping to bridge the retirement benefits gap for millions of American workers.

People First, Retirement Second

As the retirement plan landscape evolves, several growth catalysts have emerged, presenting significant opportunities for companies like Human Interest. These catalysts include new legislation, state mandates, and strategic partnerships, all of which contribute to the company's potential for expansion and long-term success. Currently, 14 states mandate such provisions, and over 30 states are considering enacting similar legislation.

The combination of the SECURE 2.0 Act and these state mandates creates a favorable environment for small-plan providers like Human Interest, as they respond to the growing need for accessible retirement plan solutions. Another driver of growth for Human Interest lies in forging strategic partnerships with organizations such as Neighborly, a franchise model with thousands of home-service professionals working on an hourly basis. These professionals, employed by companies like Molly Maid, Mosquito Joe, and Glass Doctor, represent a vast untapped market for retirement plan services.

In December, Human Interest announced that its retirement plan was available to 4,400 Neighborly franchise locations in the U.S., showcasing the company's commitment to expanding its reach and addressing the retirement benefits gap for a diverse range of workers. The ultimate goal of these partnerships is not only ease of use but also alleviating the administrative and fiduciary burden on plan sponsors.

By leveraging these growth catalysts, the company can expand its customer base, drive innovation, and play a significant role in shaping the future of retirement planning for small and medium-sized businesses across the country. As the retirement benefits gap continues to be a pressing issue, Human Interest's ability to capitalize on these opportunities will be crucial in ensuring a more financially secure future for millions of American workers.

BlackRock and Human Interest

BlackRock, the world's largest asset manager with around $8 trillion in assets, has recently taken a minority stake in Human Interest, marking its first investment in the 401(k) industry. This move reflects BlackRock's growing interest in companies focused on helping people become more financially secure, as demonstrated by its previous investments in Acorns and iCapital Network.

The investment from BlackRock comes at a crucial time for Human Interest, as the company seeks to expand its workforce from approximately 800 employees to about 1,000 by midyear and enhance its platform's capabilities. With 12,000 clients and a growth rate of roughly 1,000 new clients per month, two-thirds of whom are offering a 401(k) for the first time, the company is well-positioned to benefit from BlackRock's backing.

Human Interest's current client base consists mainly of small businesses with an average of 30 to 40 employees. By the end of 2023, the company aims to serve one million 401(k), participants, up from a "few hundred thousand" today. This ambitious growth target highlights the potential that BlackRock sees in Human Interest's ability to address the retirement benefits gap in the small business segment.

Although Human Interest offers its clients access to BlackRock funds, the default investment menu chosen by most clients consists of funds from other companies, including Vanguard Group. This demonstrates the company's commitment to providing a diverse range of investment options to its customers, while also benefiting from the expertise and resources of a global financial giant like BlackRock.

BlackRock's investment in Human Interest signifies a strong vote of confidence in the company's mission to serve the small business retirement market. The infusion of capital and resources from a leading asset manager like BlackRock will enable Human Interest to accelerate its growth, expand its workforce, and enhance its platform, ultimately contributing to a more financially secure future for millions of American workers.

Bottom Line

As the retirement benefits landscape undergoes significant transformation, it is essential to assess the potential impact of innovative solutions like Human Interest in bridging the gap for small and medium-sized businesses. By tackling the unique challenges faced by these enterprises, Human Interest has the potential to disrupt the existing paradigm and create a more equitable financial environment for millions of American workers. Given the company's strategic partnerships, integration with payroll providers, and backing from industry leaders like BlackRock, Human Interest appears well-positioned for growth in the coming years. As more small businesses seek to comply with the provisions of the SECURE 2.0 Act and state mandates, the demand for Human Interest's user-friendly and cost-effective retirement plans is likely to increase. In this dynamic landscape, the success of companies like Human Interest could have significant implications for the financial well-being of millions of Americans and the overall health of the retirement benefits ecosystem.