Arnie — A 401(k) for Everyone
Over the next few months, we’ll be introducing you to some of the sponsors, partners, advocates, and entrepreneurs who make up the unique Fintech Sandbox community.
San Francisco based Arnie joined our Data Access Residency in April of 2021. They offer 401(k)s for the modern workforce, prioritizing flexibility, personalization, and impact. Arnie allows retirement plan participants to trade individual securities commission-free, to invest in alternative assets, and to screen investment so that their retirement holdings are aligned with their values. Arnie utilizes quantitative modeling to optimize performance and minimize risk.
Arnie is a full-service 401(k) provider, offering employee communications, direct payroll integration, recordkeeping and administration, and nondiscrimination testing, in addition to investment management.
Eliza Arnold co-founded Arnie with her sister Izabel Arnold in 2021.
Q. Eliza, what’s Arnie’s origin story?
A. We started from a very personal experience. I used to be in advertising and I was working on a gun control campaign. And I found out my 401(k) was invested in gun manufacturers. It was a moment of serious irony.
I was reminded every two weeks when I got paid that I was contributing to something I didn’t personally agree with. I wanted to divest, but I couldn’t. The infrastructure wouldn’t allow it. I was invested in a big target date fund managed by a big company, and there was nothing they could do. It felt kind of crazy to me that there was nothing to be done about the way my money was invested. That was the catalyst.
I then went to my sister, who is my co-founder, who was working in private wealth management serving ultra-high-net-worth individuals, foundations, and endowments. She said the type of personalization you want is very simple from the investment perspective, but difficult because 401(k) are usually invested in mutual funds and there’s no way to personalize them.
So at Arnie we build individual portfolios for every employee using stocks instead of mutual funds. Besides divesting from what you don’t want, you get to invest in what you do want.
Q. Can you describe what it’s been like to be part of the Fintech Sandbox community?
A. It’s so useful to be in a community where people are building something that’s hard and working with a lot of regulation. We’re an RIA, regulated by the SEC. We also follow DOL guidelines because we’re in the 401(k) business. And building something for people’s retirement is super stressful.
It’s good being part of a community that gets the weight of the problems we’re confronted with. Some problems you can’t fix with tape; you really have to spend the time. That’s the biggest benefit of Fintech Sandbox. It feels like a supportive community of people solving similarly complex problems. It feels like your being held by a community, which is great.
Q. What types of plan sponsors are in your target market?
A. Our target is small to mid-sized companies and other startups like us. Companies with from five to 100 employees are usually what we work with. We don’t do 403(b)s because 403(b)s do not allow you to hold stocks in the same way. We do work with foundations and nonprofits that could have a 403(b) but decided to have a 401(k) instead.
We also work with individuals. We do solo 401(k)s as well.
Q. What should we know about factor investing?
A. In custom indexing, instead of taking a mutual fund or ETF attached to an index, you circumvent that level and buy the constituents of that index instead. So you buy the stocks directly, instead of the bundled package. That gives you the ability to control for personalization, but you’re still tracking that index.
We take it one step further. We aren’t tied to an index. Every single factor of that company is considered. You tell us you care about three factors: guns, private prisons, and equal pay. Those are the value factors that you’ve chosen. You also want to focus on high-growth companies and maybe something else. We input your factors into the algorithm we’ve built which allows us to run thousands of back tests, and we come up with the most optimal portfolio for you.
Q. Would some of those factors be your age, other assets, etc.?
A. Exactly. How long do you plan to work? What are your outside assets? Are you planning to buy a house or go to grad school? In which zip code do you want to retire? All of those pieces come into play.
Q. What else would you like to tell us about your approach to impact investing?
A. ESG is hard. It’s still in the early stages. There’s been a fast move towards adoption, but unfortunately there’s been a fair amount of greenwashing, especially on the fund level. For a lot of mutual funds, what they claim isn’t actually what’s going on. Sometimes they’re not performing as they’re supposed to, but sometimes they really are. That’s what’s frustrating.
That’s very troublesome to me. I don’t want people to think it’s all BS, because it’s not. So there’s a lot of work that still needs to be done on this. And as I said, we don’t use mutual funds or ETFs that are ESG labeled. We use the underlying metrics. We don’t use any generalized scores from our data partners, just the raw data. This is how we avoid any greenwashing happening — we go down to the lowest possible level of data.
We use a broad dataset that gives us very specific metrics — truly what are their exact Scope 3 emissions compared to revenue for last year. Not what they say it is but what it actually is. We get those super-raw metrics and we get them from a diverse group of sources. We go for very niche sources. If we need data on deforestation, we can get that from Forest 500, which has amazing deforestation values. If we need a value on equal opportunity, we might go to the Human Rights Campaign. Rather than relying just on company disclosures, we can go to a corporate watchdog that is reviewing these companies and looking into what they are actually doing.
It’s more work, but we feel it’s important. We want people to see that ESG is doing what it says it’s doing. And it’s what allows us to make every portfolio unique and personalized to the individual.
It’s unfortunate that ESG has been politicized. I started this because there were gun manufacturers in my 401(k) portfolio, but I myself go hunting. So I’m not blind to the complexities of all of this. But I should be able to invest the way I want to invest and have control over what my money is supporting.
Also, if a company that scores well on all your ESG factors isn’t performing well financially, we will absolutely remove that stock from your portfolio and replace it with one that is performing well financially.
Q. What are you seeing regarding the use of crypto in retirement plans?
A. It’s funny. A year ago everyone was asking for crypto. We’ve talked about this a lot. Our goal is to make this as personalized and flexible for you as possible. We don’t currently offer it today, because it takes a lot to do correctly, but we are working on it and have partners who are going to be able to provide custody and work within our systems.
We will cap your allocation to crypto at 5% of your portfolio, just because it’s so volatile, and take it into account as we manage the rest of your portfolio.
Q. Can employers transfer their existing plans to Arnie?
A. Absolutely. You can and it’s quite easy. We get a fair amount of conversions, either because plan participants want something different, or because the plan’s sponsor wants to do something different.
Conversion usually takes about 30–90 days and not much work is required of the plan sponsor. They notify their current 401(k) provider and we work directly with that firm. We plug directly into whatever payroll system you have. The only thing to be aware of is that we don’t work with other recordkeepers. We do all the recordkeeping ourselves.
Q. What’s next for Arnie?
A. The first and most exciting thing is we’ll be expanding the types of assets we offer. We are focused right now on expanding to privates — real estate and your own company’s stock.
If your company does well, and you hold company stock in your tax-advantaged 401(k) plan, you can put off paying taxes on the gains. Or in a Roth 401(k), avoid paying taxes on them altogether. That’s the secret to Peter Thiel’s $5 billion IRA.
We also want to do more for creators and solo-entrepreneurs working with wealth managers.
A little further off, we want to be able to partner with recordkeepers serving larger plans. We’d like for them to be able to offer Arnie as an additional investment option.
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