In Practice October 19, 2006

Cost Concerns, Ignorance Slow Small Plan 401(k) Adoption

More than 13.6 million employees in small, micro-businesses lack an employer-sponsored 401(k) plan today, a Fidelity news release said — a result that may well be the result of reluctance on the part of the owners of those businesses to embrace the concept.
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More than 13.6 million employees in small, micro-businesses lack an employer-sponsored 401(k) plan today, a Fidelity news release said – a result that may well be the result of reluctance on the part of the owners of those businesses to embrace the concept.

Fidelity claims that the majority of the owners companies with five to 20 employees that currently do not offer a 401(k) plan nonetheless agree that offering a 401(k) plans would allow them to save more for their own retirement (66%) and help their employees save for their retirement (59%).

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Additionally, small business owners understand the benefits of a retirement plan offering to their firm: almost half (44%) of small business owners without a 401(k) plan said the ability to offer competitive benefits to attract and retain employees would be a major reason to offer a 401(k) plan. In fact, a separate study conducted this year by Fidelity on small businesses that do provide a workplace plan, found that more than half (59%) cited a 401(k) plan as beneficial in employee recruitment and retention.

Concerns Cited

 

Why then a reluctance to offer these programs? The newly released study said that nearly half (43%) of small business owners said they perceive cost as a major barrier in offering a 401(k) plan to employees, while concerns about fiduciary responsibilities and perceived complexity of plan administration, were each cited by 26% of survey respondents.

Advisers would seem to be well-positioned to respond to these concerns, and to perhaps overcome this resistance. Consider that almost two-thirds (62%) of the small business owners surveyed by Fidelity are not confident in their overall knowledge of 401(k) plans, and about one out of four (26%) of those surveyed believed there is a lack of 401(k) plans to suit their company’s small size.

Advisers can address the three major concerns cited in the survey by demonstrating that that there are cost-effective 401(k) options, that certain safe harbor design alternatives can mitigate fiduciary concerns and reduce administrative complexity, and that the assistance of a skilled and knowledgeable adviser can also serve to reduce those issues.

Conducted for Fidelity by Northstar Research Partners (USA) in April, the study was based on 1,003 online survey responses from employee benefits decisionmakers at small businesses with between 5 and 20 employees that do not currently offer a 401(k) plan. The study was conducted from April 16 – April 18, 2006.
In Practice October 19, 2006

Time to Be Looking for Clients Who May be Looking

A study released recently by Fidelity Investments says that 69% of small businesses review their 401(k) plan at least once a year and about a quarter (26%) of small business owners will look for a new 401(k) plan provider within the year.
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A study released recently by Fidelity Investments says that 69% of small businesses review their 401(k) plan at least once a year and about a quarter (26%) of small business owners will look for a new 401(k) plan provider within the year.

“Most employers will review their plans in October, ahead of year-end deadlines,” said Edmund F. Murphy, executive vice of Fidelity Institutional Retirement Services Company, in a company statement. This marks a wonderful time for retirement plan advisers to be prospecting. So, how do you go about this prospecting?

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Most advisers keep some sort of list of prospects they do not currently do business with. Hopefully you have notes on how you have contacted the people on this list. In the best of circumstances, a direct mail campaign isn’t likely to have much impact and might not reach sponsor’s eyes in the time frame you need to make an impact. Although e-mail is more cost-effective, the volume of junk emails, coupled with increasingly sophisticated filters, means that your message may not even make it to the prospect, let alone be read.

One approach that may seem a bit counter-intuitive is to spend some time filtering your database to disqualify really awful prospects rather than always searching for a needle in a haystack. Work to create a short list of questions that can help determine whether or not you should spend more time pursuing prospective clients at this time (just because a prospect is disqualified for the moment, doesn’t necessarily mean it shouldn’t be reevaluated in the future, though).

Once you’ve pared down the list, few approaches are as effective as a personal contact – but you have to avoid the cold-call brush-off. Call with a purpose, a piece of information to share that you think may be of interest to a plan sponsor. For example, have the clients been visited by their adviser recently to prepare for the year-end and open enrollment period? Are they planning communication for the increases in contribution and deferral limits for 2007?

These news items provide you with an entrée for that prospecting call — not to mention a good way to reach out to existing clients. After all, why let your good clients be poached by an enterprising adviser?

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