February 29, 2024

Brad Marolf

Business & Finance Wonders

Robinhood opens waitlist for signing up for new retirement plans

With an eye to helping gig workers save, Robinhood Markets is broadening its suite of investing and brokerage services to include individual retirement accounts.

The brokerage and financial services firm announced Dec. 6 that it had opened a waitlist for investors interested in putting money into its IRA plans. Along with its usual guarantee of no commissions, Robinhood is pledging to provide a 1% match for every dollar contributed to one of its retirement accounts.

Robinhood is specifically pitching so-called gig workers and other independent contractors with no access to employer-offered 401(k) plans. In a survey of more than 1,000 gig and other “non-traditional” workers in 2020, the nonprofit public policy group Pew Charitable Trusts found that just over half had worked the previous year for an employer who offered no retirement plan. The same survey, cited by Robinhood in support of its IRA offering, found that 77.5% of the respondents had taken part in employer-sponsored plans when they were offered and nearly seven in 10  wanted access to such a plan. PEW has also found that anywhere from 3.8% to 40% of U.S. adults are current or recent participants in the gig economy, depending on what definitions of non-traditional work apply.

“We believe that saving for retirement should be easy and accessible to all, and not dependent on where or how you work,” Robinhood wrote in a blog post accompanying the announcement of its IRA plans.

Non-employer-sponsored IRA plans are already widely available from companies like Fidelity Investments, The Vanguard Group and similar firms. But employer-sponsored 401(k)s remain one of the most common ways to save for retirement. The industry and lobbying group Investment Company Institute has reported that $7.3 trillion was held in 401(k)s by June 30, 2021, roughly a fifth of Americans’ total retirement savings. About 60 million people were participants in these plans.

Robinhood made waves in the investing world in 2015 when it introduced its online brokerage service allowing clients to buy and sell stocks and other securities without paying commissions. Rival firms at the time had been charging below $10 for each trade.

With its mission to “provide everyone with access to the financial markets, not just the wealthy,” Robinhood is seeking to use its IRA offering to compete against traditional brokerages for investment dollars. Customers who sign up will be able to choose between a standard IRA and a Roth IRA. Traditional IRAs allow participants to contribute as much as $6,500 — $7,500 for people 50 or older — of their pre-tax earnings next year and defer paying taxes on that money until after they retire. Withdrawals are then taxed at ordinary rates, now topping 37%. Roth IRAs have the same contribution limit but are made with money that has already been taxed. Their withdrawals are tax-free.

Opening either type of account at Robinhood would allow customers to invest in stocks and exchange-traded funds, which track individual indexes or commodities and trade like stocks. The funds Robinhood offers will track everything from companies with a market valuation of $10 billion or more, high-dividend stocks to Treasury bonds and gold. It wasn’t immediately clear which fund families the platform will offer.

Robinhood also plans to eventually let IRA investors put money into stock options, which give investors the right to sell a stock at a set price on a predetermined date. Profits from these investments will either be tax-free — if they’re in a Roth account — or tax-deferred, if in a traditional IRA. Clients will be able to choose investments themselves or seek recommendations through Robinhood’s online portfolio builder.

Customers who now sign up for Robinhood’s IRA accounts will gain access to them over the coming weeks. The program will be fully up and running by January. Customers who refer friends to Robinhood’s IRA plan waitlist will be granted early access.

Although Robinhood has become a popular means of buying and selling stock, it hasn’t been without controversy. In October 2018, Bloomberg News reported that almost half of its revenue was coming from so-called “payments for order flow,” in which Robinhood sends information on clients’ stock traded to specific brokers in exchange for small payments. The practice has drawn scrutiny from regulators because of concerns that it promotes conflicts of interest. 

Robinhood has also been accused of enabling the “gamification” of the stock market. Its commission-free trading system, critics say, encourages placing frequent bets on the upward or downward movement of the market rather than long-term investing. In 2021, Robinhood took the unprecedented step of halting trading in stocks in the gaming store GameStop and other companies targeted in a so-called “short squeeze” — an attempt to drive up their stock prices to punish hedge funds and other investors who had bet the price would instead fall. Robinhood said it had to halt the trading to meet collateral requirements.