Robinhood, a stock-trading app that became a favorite of the “meme-stock” crowd during the pandemic, has a new proposition: Open an Individual Retirement Account with the service and it will match 1% of the funds customers contribute.
The company, which is rolling out its new retirement savings program on Tuesday, said it is the only IRA provider to offer a match on investments — a feature that is typical in many employer-based 401(k) programs. In such plans, an employer will typically match a worker’s 401(k) contributions up to a limit, often between 3% to 6% of their annual salary.
Such matches are typically only available as an employer-sponsored benefit, and only 1 in 3 Americans has access to a corporate retirement plan, according to Census data.
Robinhood is offering the match to anyone who opens an IRA through its service. The company is targeting the growing ranks of
gig workers,” contractors and part-time employees who are most likely to lack a company-sponsored retirement program, Steph Guild, Robinhood’s head of investment strategy, told CBS MoneyWatch.
Matches have been shown to be powerful behavioral levers that convince people to save more for retirement.
“The way we are working and living is changing,” with Americans more likely to be gig workers or to hold several jobs at the same time, Guild said. “That means there is a growing disconnect with the way savings are set up with the way people live and work.”
Robinhood’s customer base, which has a median age of 32, may not have the same access to employer-sponsored programs as older Americans. “We see the need for our own customer base for this,” Guild added.
The trading app’s matching contribution means that someone who puts the maximum into an IRA — $6,000 for 2022 — will receive a $60 match. That may seem small, but research indicates that the lure of a match, no matter how modest, can convince people to save for retirement, Robinhood said.
“There is interesting data on 401(k) matches that shows if a company offers a match, the rate of savings and participation goes way, way up, but there isn’t a correlation between the percentage match offered and the percentage of participation,” noted Sam Nordstrom, lead product manager for Robinhood Retirement.
There is a caveat to Robinhood’s match, however: You’ll have to keep the retirement funds with Robinhood for at least five years to keep the match. The idea is to align retirement savings with a long-term view, the company said.
If you withdraw the money before five years, you’ll have to forfeit the match. For instance, someone who invests $5,000 and gets a $50 match, but then withdraws $2,500 before five years is up, would give up $25 of that match.
Traditional and Roth IRAs
The program will offer both traditional and Roth IRAs, which provide different types of tax benefits. Traditional IRAs allow people to sock away money on a pre-tax basis, but they’ll eventually pay taxes on the funds when they withdraw it later in life.
Roth IRAs invest after-tax dollars, but investors can then withdraw the money on a tax-free basis in retirement — a strategy that is often recommended for younger investors since their tax rate may be lower earlier in their career while their earnings are lower.
Once a customer funds an IRA, investors can pick their own stocks or ETFs, or pick a recommended selection of funds that meets a specific risk and investment profile.
Robinhood said it will earn money from its new product through stock trades, similar to how its main trading app generates income through rebates from market makers and from sources such as interest from cash.
So-called payment for order flow, where Robinhood takes trading orders and sells them to larger trading firms that execute the transactions, drew the attention of regulators in 2020, which claimed the app didn’t adequately disclose its business model to customers.
Robinhood now outlines how it earns money on its site. The company declined to say how much it forecasts it could spend on the 1% match in the next year.
“Each person, whether a gig economy worker or not, needs to take care of themselves” for retirement, Guild said. “This product is the first of its kind that is trying to get people to think about it as early as possible.”
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