Rocket Your Dollar Ep. 5: The Evolution of a Self-Directed Account

Rick Dude, Co-founder and CTO at Rocket Dollar, shares his initial experience trying to open a Self-Directed account the hard way and how it drove him to co-found and work at Rocket Dollar. Thomas and Rick discuss what the Self-Directed account opening process was like before Rocket Dollar and how Rocket Dollar has taken the pain out of Self-Directed investing.

Transcription:

Thomas Young: Today we're going to talk about the technology that powers Rocket Dollar, and some of the building that we do behind the scenes to make the operating of a self-directed solo 401(k) or IRA simple, intuitive and efficient. I'm joined today by Rick Dude.

Rick Dude: Happy to be here.

Thomas Young: Who is not only one of my co-founders at Rocket Dollar, our CTO, but a good personal friend of mine. I'm happy that we finally got around to recording one of these together and talking about what it is we do all day.

Rick Dude: Right on

Thomas Young: Before we jump into the tech that we're building at Rocket Dollar, I want to get into how you found out about the solo 401(k), the pain you might have felt setting up your first account, which was not at Rocket Dollar, and some of the hoops that you had to jump through, such as getting the bank account open, setting up a brokerage account, and, just, some of the pain that led you to want to take advantage of what we wanted to do at Rocket Dollar.

Rick Dude: Yeah. I opened my first solo 401(k) 12 years ago. My accountant came to me and said, "When you do your tax planning next year, you want to make sure that you put away more money to a retirement account. The IRA limit is X." I don't remember what it was, but it was smaller. He said, "However, since you've got your own business," it was an S corp at the time, "you can open what's called a solo 401(k)." He said, "I don't know where you would go get the documents, but there's services out there."

I went and I perused online. I found an attorney out of La Jolla, California that would create the documents. A couple of weeks later I had my documents in hand. I took them down to Scottrade. They took a hundred pages to flip through the trust docs. They looked at me like I was a crazy person, but then they said, "Okay, we'll allow this." They opened a trust account, and my solo 401(k) was born.

Put away a fair bit of money that first year. I had a very good year, and then have just kept the account open in the year since. I used the money to buy a house. I used the money to pay back student loans. I used the money to start a business. I feel like it's the most important vehicle that anybody who is self-employed has at their disposal. It's a must have, along with a very good CPA.

Thomas Young: Absolutely. Digging back to what you just said, how did you pay back student loans with a solo 401(k)? One's for investing for retirement, but how did you use it to be able to pay back student loans?

Rick Dude: The solo 401(k) has a loan mechanism. Five years for unrestricted loan, five-year payback, and then a 15-year payback for the purchase of your primary residence. I would basically take a loan, pay back the debt that I had with the loan, and then gradually pay the loan back into the 401(k). I always felt like it was better to pay yourself interest than to pay somebody else interest.

Thomas Young: No, absolutely. That loan option is one of my favorite things about the solo 401(k). Not only because it gives you access to a line of cash that you can tap into anytime you want, but because of some of the creative things that people do with the money that they borrow from their solo 401(k).

We hear stories all the time from our customers about how they take a loan out to go buy a car, and then finance their car on their own, basically act as their own bank. Or, they want to invest in something that they want to have the gains available immediately, maybe like crypto, or a startup, or whatever. They just don't want to have it in the retirement account, because they don't want to wait until they retire to tap into that money.

Some of the stories that we hear about are hilarious and insanely creative. Doing responsible things, like paying down student loans, is only one of the things that people do with that money. Definitely one of my favorite features of the solo 401(k).

It's clear that you felt the pain. I'm surprised. You had a good CPA if he told you about the solo 401(k). Most people won't go through the pain of finding an attorney and setting up the docs. It was probably expensive, looking back now.

Rick Dude: Yeah, and more than the cost, it was a lot of work for me. The attorney that sold me the docs was almost nonexistent. I'd email him, I'd hear back a week later with mostly a non-answer. I had to do a lot of research on my own to make sure that this thing was going to be compliant and not have an issue.

As far as the CPA making the recommendation, I was in DC at the time. I think when you get that close to the lawmakers and where these things are happening, you get more people that are pretty knowledgeable about more complex accounting needs.

At Rocket Dollar, what we're trying to do is just make these complex accounting moves and tax moves more accessible to everyone else at a price point that makes sense at a smaller account size, and with a level of service that individuals normally won't get with a do-it-yourself product.

Thomas Young: Yeah. I think that what you just said is basically how we go into every product meeting that we have. Everything that we build is with that in mind.

Before we dig into what we're doing specifically at Rocket Dollar, I want to ask you, what were you doing with that business that you were self employed that set you on the solo 401(k) path?

Rick Dude: I was a consultant at the time. I saw firsthand the 2008 financial crisis with a front row seat. I was at Lowe's companies for about a year. They were telling us housing starts were slow. This was 2007. Then in 2008, I was at Bank of America again as a W2 employee. About three months after I got there, they bought Countrywide, realized that it was a big pile of garbage, and that they were going to have the lay off 20% of their workforce. I was in that group.

After that, I decided I was not going to have a W2 job anymore, and I was going to be a contractor. I got a nice contract for the Department of Homeland Security, specifically with the TSA, and had an option to be a W2 employee, but had a secondary option to be a 1099 contractor. Then, through that great accountant I had, he set me up with an S corp, recommend the solo 401(k), and I was able to put habits in place that I still use today.

Thomas Young: Yeah. Every time we have a conversation around a table in the office, something about your past or where you've worked always seems to pop up. You've certainly had a career trajectory that's different from anybody I know. You've worked more places than anybody I know.

Going forward, at this point, you and I's paths have crossed. We've decided that we want to attack the self-directed space, make it more accessible, less intimidating, and really bring to the mainstream market what a certain group of lucky people, a few people with good CPAs like yours, had.

We sat down in the back of another startup's office when we started this, and we started talking about the product. The first thing we did was was build onboarding, right? We had to get a way to get the information we needed to set up the accounts. That was the first thing we did. When you looked at the product as a whole, tell me about some of the goals you had and some of your vision for what you wanted to build once we decided we were going to do it.

Rick Dude: I have a lot of respect for some of the very low friction and intelligent products that are out there. I think that TurboTax is a wonderful product. I've always looked at them as the gold standard for how you solicit information from an individual, in order to get them to a financial place without them feeling like they're answering financial questions. They're just answering questions that they know the answer to. What is your name? When were your children born? Kind of thing.

That was always my goal from Rocket Dollar from day one. We should just ask some questions that they know the answer to without thinking too hard, and then, from there, we can guide them through the path.

That continues to be the case. As we have grown, I have a lot of respect for the difficulty involved in the asset transfer process, getting money in, getting money deployed to deals. There are a million variables. The fact is that most people that do real estate and private equity deals typically have a team of people around them, so trying to take that to a place where we automate a lot of the process and make it less friction, less touches, has been challenging but continues to be a focus of ours.

Thomas Young: Yeah. One of the most exciting things I think we've launched at Rocket Dollar was that transfer module where we can start taking some of the friction out of transferring. Because, the first few accounts we set up, it was painful because we didn't know what the other firm needed in order to release funds. There was a lot we didn't know. There's a lot that we've built since then to make it a little easier, and we'll continue to do so. Yeah, it's not just taking down some demographic information, opening an account, and wiping your hands clean. It's an entire process where people's life savings are moving around, and it requires an a tremendous amount of care.

Rick Dude: Yep. We had a customer that came to us. He was moving money out of an old 401(k) into an IRA. That typically involves a check in the mail. He was hitting us up about every two days asking where the money was. At one point he said, "Look," he's like, "I know that I'm bothering you a lot, but you have to understand that this was the last 15 years of my work being reflected. Right now, I don't see the money on either account." If we have empathy with our customers, what we realize is that the money that they are moving into the solo 401(k)s and IRAs is a reflection of their savings. It's a reflection of the time, effort and an attention that they have given to their career over the last five to 30 years.

It is a very serious duty that we not only handle the process in a way that is secure, and thoughtful, and complete, but that we are also communicative and we help them feel good about it. That's a ... iterative process that we will always pursue. It will always be a tenet of this company, is to do the asset transfer and the custody in a way that is both reflective of security and also reflective of low friction, and give comfort of the process.

Thomas Young: Yeah, and I think that that's a great time to give a quick shout out to Joe Won, who many of our customers that'll be listening to this have spoken to on the phone. He does a great job in helping people at least know what's going on, because it's not always clear. Not because of us, but because the firm that's releasing funds or when the money's being transferred. As much friction as we can take out.

Some people still send a check, and that's a little intimidating, especially when it is, like you said, years and years of savings. We have to be stewards of that. Joe does a really good job of making sure people are comfortable.

Rick Dude: Joe is definitely the IRA whisperer, for sure. The inverse of the discomfort as the process is beginning and while they're in the middle of it, the feeling that people get when the money hits their checking account, tax free, penalty free, and ready to deploy to an investment that oftentimes they can literally reach out and touch. It's something that's down the street or in their town. It is just amazing.

People just feel like they're really getting control back with their money. It was always their money, and now they feel like, "Okay, this really is mine to do with what I want to do, and to make my dreams happen." To go buy that rental property, to go invest in that business, or take a loan to pay my student loans back. Or, now I've got a down payment on a house. All those things are possible with our accounts, and it's amazing to watch people go through that journey.

Thomas Young: I would describe the feeling of getting the keys to your first house or the keys to your first real car that you're excited about, or whatever. Whatever it is that you're excited, but it's that feeling where you feel like, "Oh, this is cool. This is something good." Something that took a little bit of work, right? Not only to save it, but to go through the process of thinking that you couldn't touch that money until you were 59 and a half, to the point where you are now excited about all the things that you could do with it and the outcomes that you can change, not only for yourself, but for the people around you.

One of my favorite stories is our customer that rolled over his money into a solo 401(k), bought a rental property, and then is renting it to a member of his church because they had fallen on hard times. This guy had the ability to just buy a house out of his 401(k) and have it as a rental property. When that family is back on their feet, he can then continue to rent that house at market rate and collect tax free rent until he decides he wants to distribute it, or just leave it there. It's a powerful product, and you wouldn't think of a retirement product as kicking off those sort of feel-good stories, but they do happen. It's fun to see.

Rick Dude: Yeah. I think that if we are successful to the degree that I would like us to be successful, we have a tremendous opportunity to power what I would call "middle America", that largely is forgotten in many parts of our society. These are places that people are working hard. You've got small businesses, and they need capital. We have an opportunity to bring capital to those places.

Thomas Young: Yeah. We hear about money taken out of mutual funds that people are bored with. The money seems to be concentrated locally, from what we see, just from the data that we have on our investment tracker, that we can start seeing these trends. The money tends to be deployed locally. Which is fantastic, because it's a great pool of capital that's available that should be powering communities and local business, and not just big business. Definitely one of the things that I'm excited to see and continue to see.

One of the things that, pivoting away from the investments, is compliance. There's some reporting. In some ways this is an account that requires less reporting than cash. You can treat it a little more passively. But, on the other side, the penalties can be high for misusing the funds. It's obviously one of the most important things we do on a daily basis, is making sure that all of our accounts are in good standing, that our customers are in good standing, and that they're compliant.

Talking about the product and the tech that we're building, what kind of product features or tech are you putting in place or thinking about putting in place in the second half of the year to make sure that everybody's always compliant, everybody's always in good standing, and not making transactions that aren't allowed?

Rick Dude: Yeah, absolutely. The way that I like to illustrate how we handle compliance and how this is perceived by our customer is for somebody to think about their relationship with their savings account. You walk into the bank and you open a savings account, and you put the money in, and at that point your relationship is largely over. The continued interaction that you will have is to check either via statement or through online banking periodically to make sure that the money's still there.

Behind the scenes, the bank is doing all kinds of compliance with the OCC, anti money laundering, KYC. They're working with the IRS. If it's a brokerage account, they're working with the SCC and FINRA to basically continue to adhere to all regulation, and to make sure that people don't get hurt. That's what those rules over there for, to keep people from getting hurt.

We are doing our job when our customers are not being involved in the day to day with compliance. This is reporting back to the IRS. The IRS is keenly interested in this because they're getting deferred taxation through this vehicle. They want to make sure that their rules are being followed. We handle that reporting.

It's a different reporting cycle for the IRA and the 401(k). Going back to my early experience with this, I had to take on a lot of the reporting burden. We try to take as much of that away as possible. We're doing our job when it feels to the customer that there's nothing being done, and then they get that feeling like, "Okay, I don't have to worry about this because Rocket Dollar is worrying about this for me, and keeping me in compliance."

Thomas Young: Yeah, absolutely. When we started, that was the first thing that we wanted to do. There's a lot of cool product features that we can build and are planning on building to make the day-to-day operations of the account easier. Paperwork. If you're making a loan, you can log into Rocket Dollar and fill out who the loan is for. All of these things are coming, but the compliance is first. Making sure that everybody's safe is absolutely first, and something that we take seriously.

Rick, pivoting away from the compliance piece and what we're doing to take care of our customers, what does the experience look like on the tech side from someone that decides, "Yes, I want to do this. I want to roll over"?I'm going to set up a scenario for you, and then we'll go through what that looks like.

Let's say I've left a job. Let's just say I left Bank of America, and I have a 401(k) that I want to roll over. I've decided that I'm going to do some consulting, and be a 1099 self-employed person, with an LLC that I set up for myself, a single-member LLC. I want to not only make contributions to this account and lower my tax bill every year, but I want to roll over that 401(k). Walk me through what that looks like from start to finish, and how the product makes it easy.

Rick Dude: Sure. Going back to the, "We want to just ask you things that you know and not require a lot of research on your end," you come to our site, we ask a couple of questions about your personal situation. In this case, you would tell us that you're self employed and that you are a single member business, and then we put you in a solo (k).

We'd gather information about you, we gather information about your business, and then we would put you to the dashboard, at which point we present documents that needed to be signed. You get paired up with one of our, what we call, Rocket Dollar fulfillment specialists. They get the signatures in place, and then we guide you through the process of getting your bank account opened.

The whole process is very high touch. Our customers love that, because they typically have a lot of questions. Because we are a ... ever growing startup that has a keen interest in making operations more efficient, this process just continues to get better. We've rolled out new features with facilitating transfer requests in the last six months. We're working on completely overhauling our onboarding process to make it even easier, and a stronger presence on mobile that is more native to mobile. We just feel that this is going to go a long way to making our customers feel that this is something that they can tackle, and that it is not too intimidating.

Thomas Young: Yeah, absolutely. Let's say, going back to my example, that now I have a transfer. What does making a contribution look like?

Rick Dude: Making a contribution right now is mostly a manual process. You'd reach out to us, and we'd give you the paperwork that's necessary and then make the appropriate notes. It's definitely a key feature in our roadmap that we'll be knocking out to make that more automated, and give the customer more power over the contribution.\

We tend to tackle the things that are the most common thing that people want. The number one thing that people are looking for right now is transfers and rollovers, and so that's where we've directed most of our focus.

Thomas Young: Absolutely. Yeah. Most of our accounts are funded through rollovers and transfers, either from old 401(k)s that people forgot about at an employer three jobs ago, or an IRA that they have it at a broker and that they want to do something else with.

Yeah, the process is two things. One, it's come a long way since we started. Based off my experience in the past, having set up several hundred of these accounts at my previous position, I am so glad I don't have to buy pens every weekend. It was such a pain to fill out paperwork by hand. Really, what we've built, and what you guys have built, especially on the tech side, in the last 18 months or so, has been fantastic for these accounts.

We look at our competitors every day, and we go through their processes, and we see what's out there. It keeps pointing back to us. When people shop us around with other providers, we keep winning that business because it is a lot easier.

Rick Dude: It is. It is much easier, and the process just gets better every release that that we do. We really listen to both our customers and the wonderful employees at Rocket Dollar that are working with our customers. Where we are finding friction, we go to solve that.