Empower to Launch Startup 401(k) Plan Solution

Empower announced Wednesday a new push into startup 401(k) plans with a digital 401(k) solution for plan sponsors.

Set to launch in mid-2024, the 401(k) plan will give advisers and third-party administrators a new way to set up an employer retirement plan with “reduced complexity and cost while streamlining administrative duties,” according to the company. The program, Ready Select, is designed for small and startup plans with up to $1 million in assets.

The platform includes investment advisory services through a third-party ERISA fiduciary and is designed to create an “on-demand proposal and complete plan setup,” giving a plan sponsor “financial wellness and education programs that Empower provides to some of the nation’s largest corporate, non-profit, and governmental plans,” the firm wrote in the announcement.

The announcement by the country’s second-largest recordkeeper came amid forecasts for defined contribution plan creation amid incentives and mandates from both national and state legislation. On Tuesday, research and consultancy experts from Cerulli Associates forecast 401(k) plans would reach nearly 1 million by the end of the decade, in part due to those factors. As a comparison, the Boston-based firm estimated there were 668,419 total 401(k) plans as of the end of 2022.

Joe Smolen

Empower created the product for two main reasons, says Joseph Smolen, the company’s executive vice president for core markets. One was to create a more efficient and cost-effective way for advisers, TPAs and other intermediaries to set up retirement plans for plan sponsor clients. A second was to do so in a way that would help meet the wide plan coverage gap in the U.S. at a time when incentives and mandates are likely to increase need.

“We wanted to find a different way to distribute and self-serve [401(k) plans] in an elegant, intuitive and cost-effective manner,” Smolen says. “We came up with a great product, and I think we found the formula.”

Starting Up

One of the ingredients, Smolen says, is a platform for intermediaries that is highly digital and can accommodate multiple small plans in the same platform and system. Smolen noted that, while financial industry engagement in retirement plans has ebbed and flowed in his 25 years on the job, there is currently a shift toward wealth managers and nonspecialists engaging in startups.

The recordkeeper is entering a crowded space for small plan creation, including large firms such as Fidelity Investments, Charles Schwab and T. Rowe Price. Meanwhile, payroll providers ADP Inc., and Paychex Inc. are active in the space, often with captive small businesses audiences. There are also technology-driven 401(k) providers who have sought to offer more streamlined and accessible plans than larger recordkeepers such as Betterment for Business, Human Interest, Ubiquity Retirement + Savings and Vestwell.

Empower, meanwhile, ranked fourth in new 401(k) plans added in the PLANSPONSOR 2023 Recordkeeper Survey, with 10,000 plans. It sits behind Paychex  at 23,246 plans added, ADP at 22,589, and Guideline Inc. at 12,472, which are figures from year-end 2022. PLANSPONSOR is the sister publication of PLANADVISER.

Smolen says the Empower team spent time looking at the competitive landscape and believes Ready Select has one distinct advantage among the digital, self-help plan creators: Firms who start out with the platform can grow in size, need and capability, and still have everything they need from the larger recordkeeper.

“It’s a singular platform,” he says. “If we write you as a startup and get you up and running, then over two, three or five years, you grow into a multi-million-dollar plan, you will experience the same services and whatever new capabilities you need.”

Another advantage, he says, is Empower’s service model, which he identifies as both advanced and competitively priced, in part due to its scale—crucial for a fiduciary looking to provide a strong service to a client, he notes.

Empower itself has been penning startup business for years; Smolen says in 2022, about one-quarter of new business came from newly created retirement plans. Much of that business came via TPAs and an adviser affiliate network.

Savings Gap

Empower cited Boston College Center for Retirement Research statistics estimating that there are about 33% to 50% of private sector workers who are not currently covered by a workplace retirement plan.

The Setting Every Community Up for Retirement Act of 2019 and the SECURE 2.0 Act of 2022 were passed by Congress in part to increase retirement plan creation and access. Meanwhile, about 20 states have passed legislation for state mandates for employers to offer 401(k) plans, with many providing a state-facilitated option alongside private options, according to the latest count from ADP.

Empower’s announcement came on the heels of a March 21 notice that it will be providing a new suite of guaranteed income solutions for retirement plans. Those solutions are geared at addressing secure retirement income for savers, offering multiple options to convert participant retirement savings into an income stream.