Interview With Aaron Schumm, Founder & Chief Executive Officer, Vestwell
Vestwell is a digital platform that makes it easier to offer and administer retirement plans. Our solution removes traditional friction points through flexible investment strategies, streamlined administration, and fiduciary oversight, all at competitive pricing. By acting as a single point of contact, Vestwell has modernized the retirement offering while keeping the advisor’s, employer’s and participant’s best interests in mind. Learn more at Vestwell.com and on Twitter @Vestwell.
DC Institute:
Is the retirement industry behind where it should be with regards to technology?
Aaron:
Absolutely. It's the reason we created Vestwell, to help bring this industry to the modern state that it should be in. It's a difficult industry, especially given that there are four regulating bodies which govern the space: ERISA, the SEC, the IRS and the Department of Labor. That’s one of the challenges: Making sure that your solution is going to address the regulatory side of things. Unfortunately, many of the technology stacks that were put together are far past their life span now.
Although very powerful and useful for their era, what we are seeing now is that a lot of these technologies are becoming a house of cards where things have been patched onto them. There's only so much support to really take it to that next level.
There is a point in history – and that’s where we are now, I think – when we say, that was great, that got us to here. But now we are going to move on from the old car era into the age of Tesla. That is how we think about it.
DC Institute:
What role does technology play, and what are the key areas in which it can benefit?
Aaron:
We (Vestwell) think a couple things when we think about how technology can affect the industry. We now all live in an age of technology and you can use it to remove the confusion and the cumbersome aspects that come with defined contribution and defined benefit plans.
An example of that is plan design. Technology can help carry an employer through a process which can otherwise be daunting, especially for small to mid-sized businesses. Generally, a small to mid-sized business would be lucky to have one HR person to go through this process, and if the plan doesn’t have an investment committee that is managing these things, it can be really difficult for all involved. So helping employers make confident decisions in that process and getting it done with operational ease is probably one of the core things that technology can bring to the table.
In addition, making the right investment choices is, for many participants, their first foray into the investment world, so it’s natural for them to have a lot of uncertainty around what they should do. They know they should do something, but perhaps they just do not have time to do it. So being able to use technology in a very consumable, digestible manner is critical to helping people make confident decisions along the way with ease, and not be burdened with all the angst that can come with this process.
A second point I want to make is that you can use technology to help mitigate the expense of these plans and bring them out to a broader market, yet still be profitable as a business in running those plans. The last thing that we think about technology and what it can be used for is fiduciary oversight. This includes compliance reporting, guiding people within a certain set of boundaries, and monitoring their fiduciary responsibilities on an ongoing basis through technology.
DC Institute:
You mentioned the smaller and mid-sized plans, do you think technology has the potential to influence those plans the most?
Aaron:
Plans of that size are a greenfield of opportunity. A lot of small to mid-sized plans are using outdated processes, and that’s because they're forced to; it's the only way that they can be given an affordable plan.
There are certain providers out there that say, “Hey, listen, you only have 50 participants so we will give you a plan, but you're going to be required to use our own proprietary investments to help offset the fees”. That’s where it effectively becomes a conflicted plan.
“Hey, listen, you only have 50 participants, so we will give you a plan but you're going to be required to use our own proprietary investments to help offset the fees”
What we have built is an unconflicted, open architecture platform… one where we're not dependent on investment management and can use technology to scale up. There are millions of small to mid-sized businesses -- 98% of defined contribution plans are less than $25 million, representing about a quarter of the overall asset base out there in the industry.
This is also where Multiple Employer Plans (MEPs) have become a hot topic item. MEPs are intended to give smaller companies access to large company benefits by allowing them to pool their resources together. However, while MEPs get at some of the financial hurdles, they do not address the customized needs of each plan itself. They also evoke some fiduciary concerns around who is driving compliance and how all plans are ensuring their own needs and potential conflicts are being addressed.
Technology has to be able to address customization and compliance in the small market, while still servicing a plan sponsor and the participants at scale and without excessive fees. I think that's where the main opportunity lies. In terms of the up market side -- the large market or mega market -- there are definitely opportunities there as well. Obviously, the Fidelity's of the world do a good job in that space, because they have relationship managers that are solely applied to specific relationships, but you don't get that in a small market. You have to use technology to help offset those components because a plan sponsor is not going to get the white glove service as a multimillion dollar plan or even a $100 million plan.
DC Institute:
What can plan sponsors themselves do to recognize and identify uses of technology within their own plan?
Aaron:
I think that really depends on the business itself, and what they're comfortable doing. We serve plan sponsors of all occupations in all industries, from fast food restaurant chains and grocery stores, to lawyers, doctors, and late-stage private equity companies that are nearing to go public. They all have different needs. Some are technology firms which are obviously much more tech savvy than others, but some are not even wired at work, and they're not going to be the ones that are looking for technology. We've talked to people who say, “you are so tech forward, we're not sure if this is for us”. Ultimately, you have to have very candid conversations around this subject. Again, you have to know who you are, and you have to ask these questions.
We had one client -- they are a grocery store -- and they have around 1000 employees, a lot of whom were nearing retirement age. The participant base represented a generation that didn't all have email or need it. So we had to sit down with them and say, okay, great, we love having you as a client so we're going to walk you through this process and get email addresses set up for you. Are you comfortable doing this?
“Okay, great, we love having you as a client so we're going to walk you through this process and get email addresses set up for you. Are you comfortable doing this?”
For that particular example, we built many tools to help in that process. We also have playbooks or online tutorials for anyone who has access to the system which includes videos, snippets and one pagers to help guide all sponsors and participants through the process. We try to make it as easy as possible and not intrusive to a point where they’re inundated or overwhelmed.
I have been in the financial technology space my entire career. However, even with the first time I did a plan for myself or for a company, which was in another life, I was scratching my head. I didn't know what a safe harbor was or the difference between elected versus non-elected. I am finance person and a technology person so I should get this stuff, but I had no idea what it meant. Being able to educate people in a quick and easy way is imperative because things move fast, especially for a small business that doesn’t have a lot of time to spend on that.
DC Institute:
How does this benefit the participants of a plan?
“We set employees up to have a conversation about where their current investments might leave them and what that means for their retirement”
Aaron:
I personally think that one of the biggest things is having people invest with clarity and conviction. To do this they will need to know and understand the decisions that providers are making. We can't tell people, “you need to turn right, turn left”, but we can give them the materials in a quick, consumable and more digestible fashion that allows them to make a decision and understand why they are going in that direction.
We incorporate tools from an investment perspective around how they want to invest, whether they’re a savvy investor or a complete novice. In terms of managing risk, we have risk measurements we can put in place including risk alignment tools which are fully embedded. We also have retirement calculators that give individuals quick access to how much a person should be saving, what amount their employer is matching, and what the employee’s Social Security benefits will hopefully look like.
So, we set employees up to have a conversation about where their current investments might leave them and what that means for their retirement. Now this could be something they can do themselves, or the plan advisor also has use of that information so that they can step in and identify employees across the firm they need to sit down with in a matter of seconds. This should then lead to a conversation with the employee on what they are doing and what they can do better.
DC Institute:
When thinking about technology what questions should plan sponsors ask themselves?
Aaron:
Security is probably one of the biggest things people should ask, especially if they're using a technical work platform. It's critical. When we built Vestwell, one of my first hires was the head of cloud infrastructure over at Songbird at the time where he was managing the security protocols there. I got a lot of flak from my investors for it. I had to explain that we are touching the most sensitive thing in people's lives, which is their money. Outside of a person’s family; money is one of the most sensitive aspects in everyone’s life, so it is imperative that you make sure things are very, very secure.
In particular, I think all plan sponsors should ask for the result or summary of a penetration test. A lot of people talk about the Soc 1, Soc 2, the SSA 16, and so on, and those are fine, but they’re really just a snapshot in time of the monitoring procedures. They don't actually show outcomes of people trying to hack into your system. Penetration tests are great indicators of how secure a system actually is.
Another question you should ask is, what is the current state of my own data? There are things that change all the time. Then there are things like Social Security numbers and birthdates that would never change, but actually can be mistakenly changed in your system for a number of reasons. So knowing as a plan sponsor whether your data is in good order before starting this process is a huge help. Look for a platform which recognizes patterns and teaches itself to look for outliers or abnormalities in the data, and then tells the plan sponsor in real time. The more you can cleanse your data upfront the easier it becomes for annual compliance.
DC Institute:
What advice would you give to a plan sponsor who is hoping to incorporate technology into their plan?
Aaron:
Know yourself, know your business and know your employees and what's important to them. It may be that people on your team or employees are not happy with what you put in front of them. So ensure that you are conscious of that reality because no one wants to argue. Technology is supposed to make people's lives easier and almost be a process that they don't have to really think about anymore. However, you have to know your business, know what your goals are as a business, and know what you want to accomplish with what you’re offering and make sure that's articulated.
Another aspect that I don't think people think about enough is payroll and eligibility. These are the two biggest pain points from a plan sponsor component. We built patent pending logic to do all of that in real time, regardless of the payroll provider. Many of the conversations people have are around which firms they're selecting for a provider, and unless they're going through a PEO, they don't really know what they are getting. I have seen it before where plan sponsors sign up with a provider and then find out that every two weeks they get a list of the things that they’re going to have to worry about, and the plan sponsor responds with, “you didn't tell me this”.
So plan sponsors need to make sure that they have a clear understanding of what they're signing up for and who the fiduciary actually is in each of their respective parts. Whether it's the fiduciary of the plan, the administration, or the investment aspect, make sure that those things are clearly delineated, and whose responsibilities they are. This is critical, because at some point, there is going to be an audit across the firm and you want to have those things clearly buttoned up.
DC Institute:
Where do you see the retirement industry in 20 years’ time, and what role will technology have in it then?
Aaron:
I have a clear vision of that, some of which I'm going to hold back on as we have a couple of things in development which I think are truly revolutionary and will reset the bar for the industry going forward.
I think there's a conversation to be had about health and wealth, in the intersection of those. There's a couple of things that you see starting to play out now and are going to go a bit further. One is, how do you incorporate wellness at an individual level into the plan itself and then beyond?
How do we engage with an advisor who's working with the sponsor, and ultimately, the employees, although not technically engaging with employees directly at a client level? How do we allow that relationship to develop and how do we carry that relationship forward? A lot of that comes around wellness planning, but how do you do wellness planning at scale or for an employee who maybe has $10,000 invested? Creating tools which incorporate those needs in one holistic solution, I think is important.
I love the student debt repayment options that people are putting into place and I think that it is only going to get better. There are a couple of firms that are coming into the industry now that are doing some really great things around this issue.
There's the HSA component, which I love, because I really think the HSA component is an underutilized tax savings vehicle that people can incorporate into their lives. So I think a continued evolution is needed around that. Also, I think, honestly, ERISA needs to be rewritten in a lot of ways. It’s been in practice since 1974 and it's been edited and amended a number of times. But there are certain things that we should just take a hard look at and say, is this applicable in today's day and age?
I think we'll see an evolution of ERISA and what it actually means and how it applies today, and then how that carries onto a participant and their needs. How their account can become more portable, and how can we account for an individual who becomes more portable over time?
“Rollovers -- roll-ins and rollouts -- are always painful because no one wants to give up the money.”
I think some factors that are going to be key include perhaps the incorporation of blockchain thinking. How blockchain can actually create additional levels of portability of an IRA, or a rollover or things like that. I would love to see that take a more solidified form. Rollovers -- roll-ins and rollouts -- are always painful because no one wants to give up the money. So creating a quick way to move those assets, and always doing so in the vein of what's right for the participant over what's right for the provider.
When we get to that level, I think all of us will be in better shape across the country, so I am excited to see the evolution of all these things as they are starting to take shape.
DC Institute:
Aaron this has been fascinating to hear, thank you so much for your time and thoughtful insights into this challenging and ever changing industry. We look forward to welcoming you at next month’s 4th Annual Defined Contribution Roundtable on June 10-11, and eagerly anticipate your panel discussion on ‘New Generation of Tech Disruptors, New Opportunities for Your DC Plans’. Until then the DC Institute wishes you, and all of the team at Vestwell the best and we look forward to seeing what new things you have in store for us in the coming years.