Client Service December 21, 2023

Vestwell Raises $125M to Further Small Plan Push

The Series D funding round will be used to expand retirement programs for small and emerging businesses, including state-facilitated plans.

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Vestwell has raised $125 million in a Series D fundraising round led by Lightspeed Venture Partners, the digital recordkeeper announced Thursday.

Vestwell Holdings Inc. will use the funding to support small and emerging businesses that have benefited from regulatory tailwinds, such as the SECURE 2.0 Act of 2022, according to the announcement. The funding will also go toward expanding Vestwell’s work on state-savings-program initiatives while creating other savings programs for partners, employers and savers using Vestwell and for financial institutions using their recordkeeping services as a white label product, the firm noted. Last week, Vestwell announced it was backing Delaware’s state-sponsored auto-IRA program.

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Along with Lightspeed, funding came from Fin Capital, Primary Venture Partners and FinTech Collective, as well as newcomers Blue Owl and HarbourVest, according to Vestwell.

As part of the funding round, Justin Overdorff, a Lightspeed partner with a background in business development, has joined Vestwell’s board of directors, and Logan Allin, managing partner and founder of Fin Cap, will remain a board director since co-leading Vestwell’s Series C funding round.

Room for Growth

According to a recent report from Evalueserve called “Changing Dynamics of US Small Plan Retirement Market,” the small employer segment remains underpenetrated, with a significant number of private sector workers being deprived of retirement benefits.

A significant number of private sector workers within these smaller enterprises find themselves without access to essential retirement benefits, according to the research firm, which offers research, analytics and data management services.

According to data from the U.S. Bureau of Labor Statistics, 49% of small private sector firms—those with fewer than 49 employees—lacked access to defined contribution plans as of March 2022. Furthermore, small plans make up just 8% of DC assets, per a U.S. Department of Labor publication released in October.

“These employers are still struggling to offer retirement plans to their employees, predominantly owing to affordability issues due to the high cost of retirement plan administration,” Evalueserve stated in the report. “In addition, a lack of awareness about the process of offering a retirement plan is a contributing factor.”

Partnering Up

Several major retirement providers are venturing into the small retirement plan market, the research firm noted, including recordkeepers, retirement plan consultants and DC managed account sponsors.

In May, JPMorgan Chase & Co. partnered with Vestwell to provide greater support for the Everyday 401(k), the financial firm’s small business retirement plan offering. In January, registered investment advisory Carson Group paired up with Vestwell to power a defined contribution retirement offering for advisers. The two firms partner on a program called Carson Complete 401(k), designed to help Carson-affiliated advisers add or scale small and medium retirement plan practices.

“We’re exhilarated to announce our Series D round—our growth has been truly exceptional, and we’re honored to be working with an array of such esteemed investors and partners,” Aaron Schumm, CEO and founder of Vestwell, said in a statement. “We’re also excited to have Justin and Logan on our board as we partner to bring savings to a new level.”

Compliance December 21, 2023

Empower, SPARK Push Back Against Fiduciary Proposal

Their concerns arise from the wide range of sales conversations that take place between recordkeepers and plan sponsors and the potential expansion of fiduciary status to include them.

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Empower, the country’s second largest retirement recordkeeper by assets, filed a letter with the Department of Labor on Thursday, calling for the full withdrawal of the department’s retirement security proposal, sometimes called the fiduciary adviser proposal.

Empower, a Great-West Life Inc. company, manages plans totaling $1.4 trillion in assets for 18 million investors, according to the letter.

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The DOL proposal would extend fiduciary status under the Employee Retirement Income Security Act to various one-time recommendations, including rollovers, annuity sales and the sale of investment menu lineups to plans.

The letter, signed by Edmund F. Murphy III, Empower’s president and CEO, explains that the proposal would create obstacles to plan creation and could effectively ban many sales conversations between providers and plans or individuals.

Empower argues that the proposal would cover routine sales conversations that have not traditionally been considered a fiduciary function, particularly sales of rollovers and investment lineups to new plans.

“Many recordkeepers offer thousands of fund options for evaluation,” the letter states. To winnow down these options into a proper menu, “plan fiduciaries and advisers not only need assistance from product providers and recordkeepers, they expect it.”

The letter continues, “If product providers and recordkeepers determine that this rule is too difficult to apply to everyday conversations, these conversations will be eliminated. This will hurt the plan sponsor and ultimately participants.”

Many sponsors also solicit recordkeepers and managers to respond to a request for proposal. These RFPs can permit sponsors to shop recordkeeping services if they are unsatisfied with their current provider or to update the services provided by their current provider. Empower’s letter argues that these prolonged sales conversations “are tailored to meet client needs” and would likely fall under the DOL proposal.

Empower is the first major recordkeeper to submit a comment letter before the January 2 deadline. The SPARK [Society of Professional Asset Managers and Recordkeepers] Institute, an advocacy organization for the retirement plan industry, also called on the DOL to withdraw the rule during oral testimony at a hearing on December 12.

Adam McMahon, a partner in the Davis & Harman law firm, spoke on behalf of SPARK at the hearing. McMahon emphasized that the proposal would likely apply to a wide range of educational materials and services, such as those intended to track portfolio diversification, account balances or financial habits.

For example, a feature provided by a recordkeeper which walks a participant through the process of deciding between a hardship withdrawal and a loan “might recommend or suggest that a participant take a loan, instead of a hardship withdrawal, in order to minimize tax penalties or preserve savings for retirement. Under the current five-part test, these tools, which make no reference to specific investments, are not fiduciary investment advice. Under the proposal, however, they would be treated as fiduciary advice.”

McMahon added that the proposal would turn ordinary plan sales conversations with potential sponsors into fiduciary advice: “[Non-fiduciary] treatment is appropriate, as we do not believe that plan sponsors, even small plan sponsors, expect that a sales representative marketing its own firm’s plan is providing fiduciary-level investment advice.”

McMahon argued that such an expansion of fiduciary status would reduce access to these services or severely increase their cost and called upon the DOL to withdraw the proposed rule.

Concerns about initial sales conversations and educational materials arose on both days of the hearings. Tim Hauser, the deputy assistant secretary for program operations at the DOL, asserted that the proposal is only intended to regulate recommendations or a “call to action” and not educational materials and “hire me” conversations. Hauser invited stakeholders to comment on how the DOL could clarify this in the final rule.

The recordkeeping industry joins the insurance industry in its opposition to the proposal. So far, most actors in the advice industry and consumer advocacy have voiced support for the proposal.

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