Robinhood desires to be your retirement fund, providing a 1% match

Robinhood, a stock-trading app that grew to become a favourite of the “meme-stock” crowd through the pandemic, has a brand new proposition: Open an Individual Retirement Account with the service and it’ll match 1% of the funds clients contribute. 

The firm, which is rolling out its new retirement financial savings program on Tuesday, mentioned it’s the solely IRA supplier to supply a match on investments — a function that’s typical in lots of employer-based 401(okay) packages. In such plans, an employer will sometimes match a employee’s 401(okay) contributions as much as a restrict, usually between 3% to six% of their annual wage. 

Such matches are sometimes solely obtainable as an employer-sponsored profit, and just one in 3 Americans has access to a company retirement plan, in keeping with Census knowledge.

Robinhood is providing the match to anybody who opens an IRA via its service. The firm is focusing on the rising ranks of
gig employees,” 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. 

“Growing disconnect”

Matches have been proven to be highly effective behavioral levers that persuade individuals to save more for retirement.

“The way we are working and living is changing,” with Americans extra prone to be gig employees or to carry a number of jobs on the identical time, Guild mentioned. “That means there is a growing disconnect with the way savings are set up with the way people live and work.”

Robinhood’s buyer base, which has a median age of 32, could not have the identical entry to employer-sponsored packages as older Americans. “We see the need for our own customer base for this,” Guild added.

The buying and selling app’s matching contribution signifies that somebody who places the utmost into an IRA — $6,000 for 2022 — will obtain a $60 match. That could seem small, however analysis signifies that the lure of a match, regardless of how modest, can persuade individuals to save lots of for retirement, Robinhood mentioned.

“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,” famous Sam Nordstrom, lead product supervisor for Robinhood Retirement.

There is a caveat to Robinhood’s match, nevertheless: You’ll must maintain the retirement funds with Robinhood for not less than 5 years to maintain the match. The concept is to align retirement financial savings with a long-term view, the corporate mentioned.

If you withdraw the cash earlier than 5 years, you may must forfeit the match. For occasion, somebody who invests $5,000 and will get a $50 match, however then withdraws $2,500 earlier than 5 years is up, would quit $25 of that match. 

Traditional and Roth IRAs

The program will provide each conventional and Roth IRAs, which give various kinds of tax advantages. Traditional IRAs enable individuals to sock away cash on a pre-tax foundation, however they will ultimately pay taxes on the funds once they withdraw it later in life. 

Roth IRAs make investments after-tax {dollars}, however buyers can then withdraw the cash on a tax-free foundation in retirement — a technique that’s usually advisable for youthful buyers since their tax fee could also be decrease earlier of their profession whereas their earnings are decrease. 

Once a buyer funds an IRA, buyers can decide their very own shares or ETFs, or decide a advisable collection of funds that meets a selected danger and funding profile. 

Robinhood mentioned it would earn cash from its new product via inventory trades, just like how its major buying and selling app generates revenue via rebates from market makers and from sources equivalent to curiosity from money. 

So-called cost for order stream, the place Robinhood takes buying and selling orders and sells them to bigger buying and selling corporations that execute the transactions, drew the eye of regulators in 2020, which claimed the app didn’t adequately disclose its enterprise mannequin to clients. 

Robinhood now outlines the way it earns cash on its web site. The firm declined to say how a lot it forecasts it might spend on the 1% match within the subsequent 12 months.

“Each person, whether a gig economy worker or not, needs to take care of themselves” for retirement, Guild mentioned. “This product is the first of its kind that is trying to get people to think about it as early as possible.”