In the first sale of one of the budding fintech record keepers, the acquisition of Guideline by Gusto, as well as the OneAmerica acquisition by Voya, reveal how the slow-moving 401(k) industry is nearing major changes.
The dot-com record keepers of the 2000s like GoldK, Emplanet and ExpertPlan flamed out fabulously because they had a solution (the internet) in search of a problem. The new breed of fintech record keepers is focused on problems that are in dire need of a solution:
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The unprecedented explosion of plan formation due primarily to state mandates
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Antiquated and clunky technology of legacy providers that requires hundreds of millions annually to maintain and protect against cyber-attacks
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Declining record-keeping fees and the convergence of wealth and retirement at the workplace
Guideline was one of the first fintechs to emerge, relying on leads from Gusto, using technology to streamline processes and keep costs low while integrating with payroll. Sure, they have a simple solution that cannot handle complexity and larger conversions, but the small and micro markets have pushed the “easy button,” shunning complicated solutions. Just ask Paychex and ADP, who have 250,000 of the over 800,000 defined contribution plans in addition to the 125,000 plans administered by fintechs.
Without knowing the price paid by Gusto, Retireholics’ JD Carlson recently proclaimed that the recent sale proves that the Guideline experiment is a failure. In 2024, he and Charlie Nelson announced that the fintech record keepers have an unsustainable business model.
With an estimated $9.5 billion valuation and $800 million in revenue, who knows what Gusto paid for Guideline, which has estimated revenues of $150 million, reported to be profitable with valuations north of $1 billion based on the latest funding rounds over five years ago. Maybe the last investors, like General Atlantic, get just a modest return, which is usually the case, but early investors and employees might disagree with Carlson and Nelson, all the way to the bank. That’s the point, right?
Gusto might have gotten a good deal because they have leverage supplying most of Guideline’s leads, but Guideline had some leverage too. Gusto might have been concerned that a competing payroll provider without record-keeping capabilities like Workday, QuickBooks and Paylocity, or those that have it like ADP and Paychex with outdated tech, would buy Guideline. Sure, Gusto could then turn to Vestwell and Human Interest, but they would have less leverage, bogged down with unraveling the Guideline plans—401Go may not be ready to handle the volume. Forget about starting from scratch, which would cost over $500 million, three years and a start-up mentality that is no longer in Gusto’s DNA.
Where does that leave other fintechs? Vestwell is best positioned partnering with firms like Morgan Stanley, JPMorgan and Manulife John Hancock, an army of internal and external wholesalers, and a firm that Gusto’s payroll competitors may now turn to. Human Interest keeps raising money as recently as last month, which indicates they may still be bleeding cash, and is looking to disrupt, not enable or cooperate with, the DC industry, claiming they will do to legacy record keepers what mobile telecom did to the wired phone industry. Betterment is focused on trading, clearing and custody, recently turning its attention to advisor-sold DC plans, while 401Go, making good progress, is still in the early stages.
There are three ways that legacy record keepers thrive or even survive:
Scale and distribution will keep legacy providers alive, but the ability to provide wealth services to participants will define the winners, according to McKinsey, just as it will for RPA aggregators. Driven by market pressures and relentless RPAs who sold their services based on their ability to save clients’ money, legacy record keepers struggle to have healthy margins, forced to focus on wealth services.
OneAmerica had none of the three attributes, which is why it was sold for a meager $50 million up front, even though it had 1.1 million participants and spent well over $100 million on acquisitions. This must send shivers down the C-suiters’ spines at second—and third-tier providers.
The premium price paid by Empower for MassMutual and Prudential, reported to have been over $3 billion each, may be the last of their kind and may say more about Empower’s need to get to scale quickly. The $1 billion paid for Personal Capital to deliver wealth services to compete with Fidelity, their North Star and the alma mater of their CEO and many senior managers, may slow their aggressive efforts. Recent lawsuits, if successful, and SEC settlements, may slow their aggressive efforts.
Payroll providers have found ways to ride the explosion of plan formation while delivering a simple and easy solution to manage 401(k) plans of their payroll clients at a fraction of the cost of legacy providers who are trying to shift service costs to plan sponsors through TPAs. With over 60,000 Guideline plans, it is still a fraction of Gusto’s 1.1 million direct or embedded clients, which, along with payroll and retirement, is streamlining healthcare and benefits administration, potentially leveraging the third and mostly untapped leg of the convergence stool—benefits.
I say brilliant – Carlson says failure. What say you?
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