New 401(k) Plan Market Offers ‘Blue Ocean’ for Retirement Advisers

Navigating small 401(k) startup plans amid retirement legislation may be challenging for plan advisers as they face questions such as how to reach employers, how to advise on tax incentives and even what qualifies as a new plan. But the hurdles may be worth it if advisers can serve a small plan sector finally set to boom in coming years, according to industry players.

“This is a blue ocean moment,” Vestwell’s director of plan design, Kevin Gaston, said Tuesday in a webinar held by Broadridge Financial Solutions Inc. “If you are looking to grow wealth and retirement business, this is the time to do it.”

Gaston cited research showing that many small businesses still do not offer retirement plans despite legislation intended to make starting retirement plans easier and cheaper, the original Setting Every Community Up for Retirement Enhancement Act of 2019. He noted that about two-thirds of small businesses with less than 100 employees do not offer a retirement plan despite many low-cost offerings such as SEPs, which allow any employer to set up an IRA for employees.

Kevin Gaston.

“Where that might look to be a challenge, or a problem, it is also a massive opportunity for our industry, and it’s a necessary opportunity,” Gaston said. “If we don’t solve the problem, then Congress will continue to try and solve it for us.”

The plan design consultant  noted legislation proposed in Congress called the Retirement Savings for America Act that would offer a national government-sponsored retirement program. Gaston, who works for New York-based digital recordkeeper Vestwell, made the case that new plans are a unique opportunity for retirement advisers to generate business without competing for existing plan sponsor business.

“This is a chance for you to [generate plans] without having to go into what is a very competitive market of trying to get a plan from someone else or take it from Place A to Place B,” he said. “It might be nice to have a part of your business that is organically growing, not by taking things from other advisers, other recordkeepers, other TPAs [third-part administrators], whichever it happens to be.”

The Tax Play

Advisers can guide businesses on multiple areas related to retirement plans, ranging from the new mandate to offer Roth IRAs for more highly compensated workers to whether or not they even qualify as a “new” plan, Gaston noted. But the chief question, as well as opportunity, tends to be about tax credits for starting and maintaining a plan. While many advisers have had to become “tax experts,” Gaston offered listeners access to a Vestwell tax calculator designed for advisers to use with small business owners to consider their savings options.

Gaston also recommended that advisers work with small business CPAs, as their relationships could move from taxes and accounting to retirement plans. “If you have not engaged CPAs in your area, this is the bell for you to do it,” he said.

Even with all the opportunities for new plan business, Gaston acknowledged the need for advisers to figure out improved billing solutions in an industry that often operates on assets under management. He noted that, as a new best practice, some advisers are charging an up-front, flat fee to new plan sponsors for the first three years to cover starting the plan and beginning to recoup tax credits. Advisers often switch to an asset-based fee as the plan grows.

“Flat dollar, if it works for your practice, seems to be working for a number of advisers bringing in new plans,” Gaston said.

The PEP Factor

Lisa Kottler.

In a separate interview on new plan creation with Lisa Kottler, the chief growth officer for Berwyn, Pennsylvania-based Sallus Retirement, she noted the challenge of advisers selling and servicing a retirement plan market that has not evolved to reach small businesses despite “over five decades of ERISA.”

“We built plans for mid-to-large employers, but the makeup of our country is largely small businesses,” she says. “There’s that notion that plans are sold, they’re not bought, and because we didn’t build for them, we certainly didn’t sell to the small business owners.”

Even when small businesses know about the need for retirement plans, Kottler notes, employers may not have brought them on due to the costs, administrative needs and fiduciary burdens that can threaten their very business.

She points to the first SECURE Act and the creation of pooled employer plans as creating “the road map” in bringing on new plans in ways that reduce cost, risk and fiduciary burden by providing the advantages of a larger plan. With tax credits from SECURE 2.0, legislators have now “doubled down” on the opportunity, she says, because employers can recoup startup costs up to three years.

“If a PEP is done well, the adviser still plays an important role but doesn’t have to expend as much on the service side as maybe they historically had with the traditional, single-employer plan,” she says.

Kottler admits she is partial to PEPs, as Sallus Retirement is a pooled plan provider, but she says her bias “comes with a reason.” She calls the lack of workplace retirement plans in the U.S. a “looming crisis” that will leave many working Americans without a retirement plan.

She believes PEPs are a solution that can work for both retirement plan advisers and employers, if the industry can simplify its approach to selling and servicing new retirement plans.

“Let’s put ourselves in the shoes of the employers and what this looks like to them,” she says. “If we could consolidate [and] get rid of some of the jargon, the complexity, we’d find that we can get much more plan adoption.”