Small 401(k) Plans and Big Opportunity

Providers and advisers looking to service small 401(k) plans with fewer than 500 employees could find what Celent calls a greenfield space with plenty of opportunity.

Small companies employ a third of the American workforce today, Celent observes, but their 401(k) plans, where they exist at all, are expensive, cumbersome to operate and skewed toward expensive funds.

Firms like ForUsAll, Honest Dollar, DreamForward Financial, Capital One Investing ShareBuilder 401k, Employee Fiduciary, and Ubiquity Retirement + Savings (formerly The Online 401k) have responded to the dearth of adequate infrastructure in the small-plan space by rolling out automated platforms that streamline processes and eliminate back-office paperwork. Most crucially, these firms are driving down costs to the benefit of the participant and the small-business sponsor, who can now afford to access the flexibility (in terms of plan design and contribution levels) and tax benefits intrinsic to the 401(k).

Celent points to the factors—regulatory reform that is weighing on traditional compensation and fee structures, the increase of working-age Millennials and rising interest in investments that address retirement income—that are changing how 401(k) plans are delivered to these smaller firms. “Nimble and digitally focused firms are staking claims to this lucrative and fragmented market,” the consulting firm says in “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors.”

The report explores how a new generation of plan providers is making 401(k) administration less painful and more cost-effective for smaller companies, providing them access to services previously reserved for much larger firms.

Small providers will get a tailwind from the imposition by the Department of Labor (DOL) of a uniform fiduciary standard, with the fee transparency that entails. The entrance into the workforce of Millennials, whose self-directed but advice-friendly mindset aligns closely with the tech-driven model propagated by the new generation of providers, represents another potential inflection point.

“Once participants realize the extent to which they are being dunned of their retirement savings, some may change jobs; others will spur their employers to explore new provider options. The voices of these participants will echo loudest at the small end of the market,” says William Trout, senior analyst and author of the report.

The report, third in a retirement investment series, examines why small plans can be so expensive; the advantages of the 401(k) plan over other types of defined contribution plans and the offerings of new plan providers. A detailed comparison of six new providers of small plans—Ubiquity Retirement + Savings, ForUsAll, Honest Dollar, Dream Forward Financial, Employee Fiduciary, Capital One InvestingSharebuilder401k—outlines their key features, investment offerings and fees. A previous report looked at how advisers can better serve plan participants.

More information about “Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors” is on Celent’s website.