Robinhood will pay a 1% “match” on customer contributions to retail Individual Retirement Accounts

Robinhood brings the concept of a 401(k)-style contribution to its retail customers who may not have access to a workplace retirement plan.

The retail brokerage will pay a “match” of 1% on its clients’ contributions to a Robinhood Individual Retirement Account, the company announced on Tuesday.

The company bills it as the first-ever paid match to retail IRA customers (i.e. outside of a workplace retirement plan.) Robinhood has over 12 million users active monthly accounts and 23 million accounts funded, said Stephanie Guild, head of investment strategy. .

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It is rolling out its Robinhood Retirement service widely in January. Customers can also join a waitlist starting Tuesday and gain continued access in the coming weeks.

A matched 401(k) is a common retirement benefit offered by employers who sponsor a workplace retirement plan. It is a financial incentive for workers who are saving for their retirement.

Some experts see Robinhood’s IRA Match as a benefit that can encourage and boost savings, especially among construction workers, younger investors and people of color – groups more likely to lack access to savings. -retirement at work.

Others are skeptical whether the relatively small amounts of dollars at stake will equate to positive behavior change, and wonder if it’s more of a marketing effort to stand out amid fierce competition. abundant.

“There’s never a free lunch,” said Philip Chao, director and chief investment officer at Experiential Wealth in Cabin John, Maryland. “You should always ask for the motivation of the entity or individual offering you a free lunch.

“Why are you buying me lunch?” ” he added. “I think that’s the central question.”

A 401(k) match is typically structured as a share of employee contributions. Let’s say a worker saves 6% of their annual salary in a 401(k); an employer can match 50% or 100% of that dollar total, up to a federal limit.

The concept of Robinhood is similar. The company will match 1% of new contributions in a pre-tax or Roth account, up to the annual IRA contribution limit. Some IRAs—like SIMPLE IRAs, which are offered at the workplace—allow employers to give employees consideration; the Robinhood match arrangement, however, is not tied to workplace savings.

But there are key differences in how the game works. A typical 401(k) match is usually a percentage of a worker’s compensation, while Robinhood’s is a share of an investor’s contribution.

There’s also a lower annual cap: In 2023, savers can’t contribute more than $6,500 to an IRA, per federal rules. Investors aged 50 and over can contribute an additional $1,000.

So an investor under 50 who contributes the maximum $6,500 in 2023 would receive $65 in matching funds from Robinhood – for a total balance of approximately $6,565.

In comparison, the dollars at stake are much higher in a 401(k) plan. Savers can contribute up to $22,500 to a 401(k) in 2023. Total contributions (including employee contributions and employer matching, for example) are capped at $66,000.

There is no contribution or account minimum to get the Robinhood match, and transactions are commission-free. Investors can invest in the universe of stocks and investment funds available on Robinhood’s platform, or choose to get a single asset allocation recommendation that includes up to approximately 10 exchange-traded funds.

While investors would receive the matching money immediately, they must keep their Robinhood IRA account open for at least five years to permanently retain the matching funds – a concept similar to the 401(k) acquisition.

Transfers from a 401(k) or IRA account to a Robinhood Retirement account do not count toward the IRA match, the company said in an email, adding that it is “exploring a separate matching option for transfers to the future”.

Robinhood expects the money to accumulate over time. A long-term investor who gets a consideration of $60 each year and earns a 10% annual return would have an additional $26,000 after 40 years, according to the firm’s analysis.

“I think any sort of compensation for [investment] fresh or any kind of small addition [to savings]it all adds up over time,” said John Scott, director of retirement savings at The Pew Charitable Trusts.

“I think the big question will be, what is the behavioral effect?” said Scott.

In other words: to what extent will the financial incentive encourage people to save? Many employers have adopted automatic enrollment to combat relatively low 401(k) participation despite the availability of matching funds.

To date, most policy initiatives to encourage savings have focused on the workplace. Lack of access to 401(k) plans at work is one of the biggest flaws in the US retirement system. States have passed laws in recent years establishing self-enrollment IRAs for workers who don’t have workplace retirement plans, for example.

“Maybe it’s just a marketing gimmick, the 1%,” Scott added. “But if it gets people into the habit of saving, it could have a big impact.”

Pension experts have likened the game to banks offering “free” toasters and other perks to customers who open a certificate of deposit.

Here, Robinhood is likely aiming to grow its customer base – and then make money elsewhere by trying to sell them to other services, experts said.

Robinhood saw its growth reverse as a pandemic-era retail boom faltered. The firm announced a few tranches of layoffs this year.

“It’s getting harder and harder to get past [of customers] and break up the clutter,” said Neil Bathon, founder and partner of FUSE Research Network, an asset management market researcher. “I can’t imagine trying to start an IRA business and not having a program like this. to kind of fuel prospecting efforts.”

Robinhood hinted at meeting current customer demand and expanding its footprint, but declined to offer a forecast of growth or total cost.

“We have heard from our existing customer base that they have a strong interest in expanding Robinhood into the retirement space,” the company said in an email. “We want to deliver great value to a broader customer base through a platform that supports long-term investing, and retirement is just the start.”

It can be difficult to get people to open an account when the incentive can be $50 or $60 a year in dollars, Chao said.

“One percent sounds good, but do you think 1% will inspire people to save anyway, while 3% won’t inspire them to save in a 401(k)?” he said.

Correction: This story has been updated to reflect how the Robinhood match works against the annual IRA contribution limits.