Growth in the small-plan, startup 401(k) market has exploded due in part to state mandates, with legislation approved or pending in all but four states. Tax incentives for smaller entities in the recently passed SECURE 2.0 legislation to subsidize the costs will likely only accelerate the trend, as could the ongoing war for talent through benefits and especially 401(k) plans with a match.
Currently, most experienced retirement plan advisors do not want to work with smaller or start-up plans, as it is hard—if not impossible—to make money in the segment, which also can take precious time and resources from larger, more lucrative opportunities. Due to the liabilities and complexities associated with 401(k) plans, most wealth advisors would prefer to focus on more profitable individual clients. In addition, just a handful of providers are willing to service smaller or start-up plans.
Looking at the numbers, there are nearly 700,000 defined contribution plans today, but another five to six million companies could be subject to state mandates, dramatically increasing the potential for new private plans.
Who will service this group?
Besides advisors, one possibility is benefits brokers whose margins are being squeezed by the Affordable Care Act; however, they can still earn much more on healthcare than retirement plans, where they have limited knowledge and experience. It is likewise doubtful that state-licensed insurance brokers selling annuities will be able to serve the DC market due to its complexities and potential licensing and fiduciary issues.
Certain approaches could make the small and start-up plan market more attractive to advisors; for example, bundling companies in a multiple-employer plan, pooled employer plan or group of plans can simplify administration and marketing, although it doesn’t necessarily reduce costs. Third parties including Morningstar and Envestnet are willing to act as 3(38) investment fiduciaries while others may take on 3(16) administrative duties.
Fintech recordkeepers, including Guidelines, Vestwell and Human Interest, pulled in almost $800 million of assets in 2021 by focusing on smaller start-up plans. Payroll providers also serve this market: Paychex recently is said to have sold 22,000 plans in 12 months. Traditional providers like Ascensus, Empower, Nationwide and John Hancock are creating products to serve the smaller 401(k) market.
Advisors may want to help smaller companies with their DC plans in order to develop wealth services for owners and senior managers, and to establish relationships with “HENRYs” (high earners, not rich yet). Advisors who are part of a benefits organization can cross-sell other services as well. And, of course, accessing retiring employees’ IRA rollovers and retirement income and annuities could provide additional business.
Yes, most retirement plan and wealth advisors have avoided the small and start-up 401(k) market, but that doesn’t mean that more forward-looking folks won’t see the opportunity, including those who may be more comfortable with changing industry dynamics. In our view, eventually, providers will likely step up to serve the many new 401(k) plans with scaled down, low-cost and minimal service plans, leveraging technology. Recordkeepers, in particular, could look to cross-sell wealth and benefits services. Whether advisors are a meaningful part of this growing business is really up to them.
