What's behind Vestwell's $125M Series D funding?

The fintech that has been winning bid after bid in the state-run retirement plan market, Vestwell, just got an additional $125 million in funding.

That firm, which has been quickly building its business in the auto IRA, 529, ABLE, and 401(k) arenas, today announced the results of its Series D funding round, which was led by private equity firm Lightspeed Venture Partners.

The company has grown its revenue and client roster by tenfold over the past three years, CEO Aaron Schumm said. And it has hired 150 people over a year, reaching a headcount of about 350.

That’s been all but necessary as it has tacked on mandates from state-run programs. The company is the record keeper or administrator for more than 30 of those, and this year it landed a deal with J.P. Morgan to be the record keeper for Chase’s small-business savings program, Everyday 401(k), which at the time represented about $27 billion in assets.

And as the firm has added partnerships with states, that has positioned strongly to add more.

Long game

“We are playing a very long game in terms of how we think about this world,” Schumm said.

The company spent years working with the idea that it could break down walls across the various types of tax-deferred accounts, seeing an opportunity to be more efficient than incumbents and make people more aware of the saving and investing options available.

Schumm said he thinks about those types of programs – 401(k)s, auto IRAs, 529 college savings accounts and ABLE accounts – as a “sphere of savings” that can fit the needs of different people.

“What if you took a 529 college savings plan and brought that into the workforce?” Schumm said. “That’s a lot of how we think about it.”

More funding

The recent funding round – by far the largest in Vestwell’s history – included existing investors Fin Capital, Primary Venture Partners, and FinTech Collective. New investors included Blue Owl and HarbourVest.

“Their commitment to the thoughtful execution of its plans assures us of its stability and growth potential in the workplace savings and investment space,” said Lightspeed partner Justin Overdorff, in the announcement. “The platform is already transforming the financial futures of countless Americans, demonstrating not only a strong, healthy enterprise [software as a service] business model but also a clear, decade-long vision.”

Overdorff is also now on Vestwell’s board.

Vestwell was not out fundraising when it was approached by Lightspeed, Schumm said. The company plans to continue its existing strategy but now has much more funding to accomplish its goals, he said.

The firm, which is valued at about $1 billion, has raised a total of $237.5 million, according to data from Crunchbase. Other investors include Goldman Sachs, Allianz Life Ventures and Northwestern Mutual, among others.

Ramping up

Prior to the Series D funding, the company “was already poised to reach profitability,” the announcement read.

In the state-run plan market, “there is a heavy startup cost. You’ve got to get to a certain scale before you earn back those startup costs, and you’re covering your operating costs,” said Andrea Feirstein, managing director of AKF Consulting, which advises states on hiring service providers for 529s, ABLE programs and retirement plans.

“This funding round is confirmation that there are investors who believe in the business … [it] validates what they’re trying to accomplish and their emerging position as a leading provider.”

So far, “they have won every single bid” they have made for state retirement programs, she said.

With early recent wins for contracts in New York and New Jersey, “the state-run retirement program industry really is consolidating with Vestwell.”

AKF, which today published its yearly review of the state-run retirement plan market, notes that such programs started switching administration costs from asset-based fees to dollar fees as Vestwell was engaged by Connecticut and Oregon.

The company is the record keeper for nearly half a million 529 college savings accounts, totaling nearly $15 billion as of the end of the third quarter, according to data from ISS Market Intelligence. It also administers more than 74,000 ABLE accounts, totaling $735 million in assets, representing a 47% share of that market, the data show.

“This is very much a relationship game … A lot of the same state agencies or even the same exact person oversee the 529, the ABLE program and the state-facilitated retirement program,” said Paul Curley, director of 529 and ABLE solutions at ISS Market Intelligence. Vestwell “play[s] very well together in those different courts, and they’ve been able to pick up their wins.”

It’s also notable that Vestwell this year bought student-loan benefits provider Gradifi Solutions from Morgan Stanley, Curley said.

And he credits Schumm as being a visionary but being more accessible than the typical fintech CEO.

Although the company isn’t changing course with the additional funding, Schumm pointed to some new areas where it is headed. The firm today launched for one client a beta version of a chatbot-style “AI solution” designed to help provide education for investors, he said.

Something big on the horizon

He also hinted at a forthcoming “lifetime income offering” incorporated into personalized investments that could launch next year, working with a global investment manager that is not yet being named publicly. That, if successful, would be a major development in the employer-sponsored plan market, where features like annuities are technically available but seldom used, despite regulatory efforts to make them friendlier to 401(k)s and more portable for workers.

“I think we’ve cracked the code on how to deploy a lifetime income feature in-plan that leapfrogs everything out there in the market,” Schumm said.