Do Venture Capital Investments in new 401(k) “Start-Ups” Make Sense? (Part 3 of a 3-Part Series)

In Part 1 of this 3-Part series, we discussed the problems of 401(k) fees skimmed from investors’ retirement savings, and how these fees become the primary economic driver and profit center that attract venture capital firms.

Part 2 of this series listed three reasons why the small 401(k) market is the wrong target for venture capital firms to invest in. These three points are:

1. The vast majority of US small businesses do not offer employees 401(k) plans because of their cost and complexity, and this has been a constant fact since inception of 401(k) plans 30 years ago. Most small companies are run by business people who try to avoid offering employee benefits because they take time to manage and increase overhead.

2. 401(k) fees that are skimmed from 401(k) savers’ retirement investments are legal only if deducted by SEC-registered representatives. The fees are often hidden and not understood by most 401(k) savers, and are pocketed by financial advisors disguised as 401(k) providers. Once the fees are revealed and disclosed, they bring “bad press” and possibly litigation against the venture capital firm.

3. The history of venture-backed 401(k) providers has been littered with failures going back to the inception of 401(k) plans. We are not aware of any venture-backed 401(k) provider that has been a financial success.

In this final Part 3 of the series, we want to concentrate attention to public policy. 401(k) plans are, in fact, a benefit to American workers. Unfortunately, because of their complexity and high relative cost, most workers employed by small US businesses do not have access to the many benefits of 401(k) participation. The cash investment that venture capitalists make in setting up a new 401(k) provider has the unfortunate result of raising the cost for all small 401(k) plans because the venture capital firms expect a return on their cash investments. Making small 401(k) plans more expensive is contrary to public policy if the goal is expanding American workers’ access to 401(k) plans.