Practice Management August 1, 2023

Stumbling Blocks for 401(k) Startups

Small plan options abound for employers, so why do only 34% of small businesses offer workplace retirement plans?
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Art by Miriam Martincic


There is no shortage of relatively cheap, easy-to-implement options for small employers to offer retirement plans to employees. Options range from Savings Incentive Match Plan for Employees IRAs for businesses with 100 or fewer employees to digital 401(k) plans with all types of customization and pooled employer plans that leverage scale.

In addition, the SECURE 2.0 Act of 2022 has improved incentives for starting a retirement plan, offering businesses with 50 employees or fewer a credit of up to 100% of plan expenses, not exceeding $5,000 annually, as well as an employer match credit of up to $1,000 per employee per year. That all comes before mentioning states that mandate and offer plans, which, although mostly new, are starting to take hold.

These options and nudges show industry leaders trying to move a needle that, according to Fidelity Investments’ latest research, shows that only 34% of small businesses currently offer a workplace savings plan.

“We’re not lacking options. In my opinion, I don’t think we need more options,” says Chantel Sheaks, vice president of retirement policy at the business advocacy group U.S. Chamber of Commerce. “But then the question is: Why aren’t employers [implementing] saving on their own?”Researchers and industry participants often cite similar stumbling blocks for businesses looking to start up retirement plans: costs the businesses feel are better put elsewhere; limited administrative resources; lack of awareness; and lack of employee interest.

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Sheak, whose position at the Chamber of Commerce gives her a national view of the market, notes that many small businesses in the country are simply not focused on adding a retirement plan because they are trying to get their business off the ground.

“If I’m just now starting a business, when a lot of small businesses are going out of business between one and three years, [a retirement plan] is a big commitment to your employees, on top of running a business,” Sheaks notes.

Intimidation Factor

Many business owners may want to offer a plan, but feel they are too small and that the benefit is beyond their capabilities, says Eric Droblyen, president and CEO of Employee Fiduciary.

“One thing that we’ve found is that a lot of people are intimidated and think it will take a lot more time [to start up a plan] than it will,” he says. “That’s a bigger obstacle to adopting a plan than things like pricing.”

Droblyen, who writes for business owners on his “The Frugal Fiduciary Small Business 401(k) Blog,” encourages breaking down a startup plan into discrete tasks so “it’s not this nebulous blob of responsibility.”

While tax incentives and state mandates are intended to drive plan creation, they can also create further complexity and intimidation, Droblyen says. To try and simplify things, he created a tax credit calculator that incorporates the SECURE 2.0 startup incentives, auto-enrollment paybacks and employer contribution tax credits, based on business size.

“A lot of people don’t know about these incentives,” Droblyen says. “But when you see the math, you can see that they are pretty generous.”

Even with strong incentives, Sheaks says, many businesses find they need to focus their capital on the basics, like business operations and paying their employees. Furthermore, there is often a mismatch between what small business employees want and what their employers think they want.

“Some of the research shows that employees do want retirement plans, but if I [as an employer] have to go down my hierarchy, probably which ones I’m going to do first, it probably would be a health plan,” she says. “I think it’s once the employer gets established, then you start seeing them really starting to look at what could a solution be for retirement plans.”

From Health to Wealth

Sandy Kenslow, a vice president and director of small group benefits at digital insurer Mylo, sees small businesses looking to offer health benefits to employees on a daily basis. Very often, she says, they come to her for health benefits, but as that conversation progresses, they ask about the possibility of adding a 401(k)—if tentatively.

“These are clients that are turning to us typically the first time out of the gate because they need business insurance and liability or cybersecurity [insurance],” Kenslow says. “As they get more employees, they need benefits, and typically after they get a benefits program going from a health insurance perspective, then we’ll start getting questions about whether we do 401(k)s.”

Kenslow says many small businesses are not aware of the development and possibilities for workplace plans. They rarely know the tax incentives on offer or the reality of state mandates that require they offer plans.

“We are always trying to connect our small businesses with resources, because they really don’t have any, and they can’t afford to pay for an entire HR department,” she says.

For many years, Mylo would pass on 401(k) startup referrals to providers such as digital 401(k) company Ubiquity Retirement + Savings. Eventually, the firm decided to formalize the relationship with Ubiquity, and now they are the preferred small plan provider for businesses with which Mylo works.

With that relationship, Kenslow says, her team can turn employers over to small plan experts to explain the space, offer flat-fee plan subscriptions and customize plans, depending on the need. The motivation for Mylo to provide these services beyond its own core business, she says, is so the firm can be there when small plans grow and increase services, as well as scale.

Initially, however, one key way to get a business owner interested in a workplace retirement plan is to engage them in discussion of their own retirement savings, according to adviser Droblyen.

“In the small plan market, the business owner is also probably going to be the biggest beneficiary of the plan,” he notes. “They are going to have the largest account balance and may benefit the most from a high quality plan.”

Droblyen says that when he can explain the “win-win” for a business owner, both for themand for their employees, a signing may soon follow.

“We try to take a consultative approach without overwhelming someone,” he says. “Business owners have lots of options. We try to do a really good job of making those options known in a way that isn’t overly complex or scary.”

 

Deals & People July 3, 2023

Inside the Deal: What Makes Retirement and Wealth M&A Stick?

Aggregators discuss the importance of a robust onboarding protocol that ensures an acquired advisory is set up for continued growth.
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Art by Alfonso de Anda


A global pandemic. Market volatility. Rising interest rates. Almost nothing seems to be stopping the rampant merger and acquisition activity in the workplace retirement advisory and wealth management space.

In June alone, PLANADVISER has reported on acquisitions of advisors managing billions of dollar by SageView Advisory Group, Hub International Ltd., OneDigital Investment Advisers LLC, NFP Corp., and Cetera Holdings, an advisory network focused on the individual client space.

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Experts have been predicting that the confluence of factors in the market—including the higher cost of borrowing money—would start to dent transaction volume. According to M&A consultancy Wise Rhino Group, deal flow in retirement and wealth had a modest decline in 2022, but through the first two quarters of 2023 has come in strong “as private capital continues to chase the independent retirement and wealth advisory space.”

But acquisitions do not necessarily mean sustained success and growth for the acquired advisory or its new parent. How are the aggregators managing all this inflow? And perhaps more importantly, how are they seeking to make the deals stick for the long term?

Joe DeNoyior, president of Hub Retirement and Wealth Management, says it’s a process of identifying an adviser or advisory team that is the right fit for the aggregator or broker/dealer’s needs, but also one that has a growth plan that will be fed and supported by joining Hub’s network of retirement, wealth, insurance, and employee benefit offerings.

“By bringing those folks into our organization, does it allow them to continue to grow? Even add fuel to their growth?” DeNoyior says. “That is absolutely key for it to be a success.”

Expanding the Circle

DeNoyior came from the retirement plan advising side of the business, joining Hub in 2019 when his Washington Financial Group was acquired by the aggregator. Many of the aquisitions of retirement advisories—which, like DeNoyior’s WFG, often already have some wealth management—stemmed from relationships and knowledge about potential adviser target, with everyone being from the “401(k) circle.”

“When you look at all the acquisitions, we had a relationship in some form or fashion with a lot of them in the beginning,” he says. “Now, as we expand our circle, we have to spend a little bit more time learning more about the actual individuals in that firm.”

Over at OneDigital, which has also been rapidly expanding in recent years, the aggregator is also looking for partners who see the benefit of joining a larger organization that can help them fuel growth.

“We are very intentional, because we want to make sure that people that join our organization are taking advantage of the things that we can provide and that would make them more effective and efficient,” says Carrie Ohm, vice president, corporate development.

Ohm, who spearheads OneDigital’s onboarding process, notes that not all deals make it to the end. Very often, it’s within the 90-day vetting process that questions or issues emerge that are a red flag to both sides that it’s not going to be a good fit.

“Inevitably, as you get into the consummation of the deal, what we call the final diligence phase, people will show their true colors,” she says. “It takes somebody who understands the benefit of aligning with the bigger company and giving up some of the control. That is not for everybody.”

Deal Architects

Ohm came to OneDigital from a career in recruiting financial advisers and advisory teams. Leading the company’s acquisitions team was a great fit because, she says, it had many similar components to recruiting teams that would be a good fit for the business and lead to further growth for both sides.

Even so, she cites the many “complexities that come along with the acquisition landscape.” In just the past two years, Ohm says, she and her team have worked on 23 deals in the retirement and wealth management division.

As a “deal architect,” Ohm says that the only rule of thumb is that no two deals are alike. “When you’ve seen one M&A deal, you’ve seen one M&A deal,” she quips.

To get through the large amount of deal volume, OneDigital has 35 people on its acquisitions team that begin work as soon as a letter of interest, or LOI, is in process. Once a deal is done, however, the team’s work begins to fully integrate and set up the new business for success.

“One of the things we have learned from the acquisitions we have done is that if we rush the process, it is likely to create issues either with the integration or with the onboarding of the teams, and certainly could impact client retention,” she says.

At OneDigital, something the aggregator has only started doing in recent years is identifying an executive sponsor to partner with the acquired firm, Ohm says.

“That person is charged with helping [the acquiree] find their way,” she says.

Breaking Bread

Over the past year, Arthur J. Gallagher has built up both its retirement and financial wellness acumen with the purchase of advisory firm Buck, as well as F3 Companies, a turnkey wealth management provider.

Now, Gallagher is starting a push—largely in the western U.S.—of acquiring financial planners to provide participants with wealth management services, says Jeff Leonard, Gallagher’s financial and retirement services practice lead.

Leonard says he has a team that is “spread out geographically” and tasked with looking for acquirees in financial advisement that fit Gallagher’s needs.

“Culture is really important,” he says. “If we are going to grow through acquisitions, then you need to have a great cultural fit so you are not constantly banging heads. … I like to ask, ‘would you have this person over to dinner? Would you introduce them to your family?”

Part of this fit, Leonard says, is finding advisories that are excited to take on the Gallagher brand and ethos. That doesn’t mean, he says, that it’s “Gallagher’s way or the highway,” but that they want a collaborative culture where there’s pride in the brand and the capabilities of a national team.

To ensure that success, he says, they like to bring potential acquisition targets to Gallagher’s headquarters in Rolling Meadows, Illinois, to “break bread.”

“I think it’s important for people to see us in our natural habitat,” Leonard says. “We want them to know what it’s going to be like from day one, before we close a deal. That’s really important to us.” 

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