5 big questions on innovation

The US retirement space has changed significantly over the last few decades. People of a previous generation were more likely to receive a guaranteed pension either from their employer or the government. Today, Social Security is not enough to provide a stable retirement, and guaranteed pensions have largely disappeared. So Americans have to fend for themselves and are left with a legacy 401k system that was never designed for the middle class.

It has an overwhelming amount of choice, often high fees, and often poor selections of index funds. Many people are bewildered and overwhelmed by this complexity, and make no choice, often missing out on a decade of compounding returns. Others can make bad choices and pay away up to a third of their nest egg in fees, often without knowing it. 

Blooom is the first company that has a completely fresh approach to the 401k space. We are an online service that analyzes any 401k, no matter where someone works. We then recommend the necessary changes. Finally, if the client hires us, we completely take over the management of their 401k – we make the changes for them, we keep an eye on the accounts, and we rebalance it over time. We are not a ‘Do-It-Yourself’ Solution. We are a ‘Do-It-For-You’ Solution. All for a Netflix-like subscription fee of $15/month or less.

We use the image of a flower (hence blooom!) to represent the health of the 401k, instead of complicated jargon or charts or graphs that no one understands. Clients love the simplicity and we have grown quicker than anyone else in the automated advisory space in the first year since formal launch. We manage 401k’s for people in 48 states, from age 22 to 67. Our mission is to fix broken 401k’s for millions of Americans.

There are a few impediments that have really kept 401k’s in the 1980’s, despite the advancement of technology. Firstly, 401k’s and retirement are seen as an HR function in the benefits department. Therefore the executives making the decisions on 401k’s have ten other benefits to worry about and are not finance people. So the 401k’s have often been littered with poor fund selections that end up being egregiously expensive for their own employees. There was even a time when the corporation would get kick-backs or part of the very mutual fund fees that their own employees were paying for their retirement.

Paradoxically, retirement became a profit center for the very corporation that was supposed to be providing you with benefits. The second major issue is that government largely thinks of the savings problem as a tax issue instead of a complexity issue. I.e. Government thinks if they can just offer you more attractive tax deferrals in your Roth IRA, that tens of millions more Americans will save more money. But behavioral economist after behavioral economist has told the Senate that it is not about taxes. The overwhelming majority of Americans don’t understand the complex tax system. What they need is a very simple system, without jargon, that makes making the “right” choice an easy proposition. There is no innovation, use of technology, or simplicity in the 401k system. This needs to change.

Well I am quite new to Blooom, but am not new to its mission. I think we try to think of every decision we make through a human lens. Finance is complicated – often purposefully – so no one can understand it and so that lots of people can continue to make lots of money off an unsuspecting general public. Our view is that anything we do needs to be understandable to someone who knows nothing about finance.

That’s why we charge people a transparent, monthly subscription fee instead of the industry standard of “basis points” or “expense ratios” that get deducted out of people’s accounts without them knowing it. That’s why we use simple imagery to explain one’s 401k instead of a complicated chart. Because of this drive to make everything human, we are forced to keep things really simple. And in finance, keeping things extremely simple turns out to very innovative, and something that people love.

The biggest change will come within 5 years, when the millennial generation will constitute half the global workforce. People underestimate how differently millennials think about money versus baby boomers. Millennials like simplicity, transparency, the predictability of software, the ability to tap the wisdom of their peers and crowdsource an answer instead of paying an expensive advisor for the answer. And that advisor had to deal with lots of paperwork that also runs up the costs. All of this is going away in the investment management business. I think costs will come down and transparency will hopefully go up.

I think much of what is going on in the mobile banking space in developing countries around the world has been truly extraordinary. Examples like M-Pesa that started in Africa, which allows those who don’t have access to a bank to perform much of the basics of banking – sending money, paying people, saving small amounts of money. Why doesn’t the developed world follow this example and make it easier for everyone to be banked? 

I also think some of the “Nudge” practices going on around the world in national savings systems is good. For example, we know that the only proven way to make people save money is to make it easy for them. I think the 401k system for example should move in an opt-out/nudge direction. For example, when a new person joins a company, start taking some small amount out of their salary and putting it away for them in a low cost, appropriate investment. This will then escalate this percentage over time or when the person gets a raise. And the employee can absolutely opt-out. But what economists find, is that few people do opt out, and ultimately are happy that this inertia set in.

Companies are allowed to automatically enroll their employees to 401k plans, yet only about half of corporate CEO’s choose to do so. This is very sad, since many people could be contributing to a nest egg, and often getting free matching from their company, yet they don’t do so because they never get over the hurdle of signing up for their 401k in the first place.