What Is Driving Plan Startups?
By most measures, defined contribution plan growth has boomed over the past decade, even before much of the implementation of the SECURE Act 2.0 of 2022 and the proliferation of state mandates, many of which have not yet launched their programs.
From 2009 to 2022, the U.S. added 144,000 employer-run 401(k)s, ending 2022 with 741,000, according to the most recent tracking from ISS Market Intelligence’s Brightscope, which, like PLANADVISER, is owned by ISS STOXX. While the numbers are still being crunched on Form 5500s from 2023, signs point to the addition of a good chunk more.
“We’re expecting another strong year of net new plan addition to the market in 2023,” says Viraaj Kumar, associate director of ISS Market Intelligence, who says new figures should be out in the coming weeks.
According to ISS MI and the Investment Company Institute, there are still some 6 million businesses in the U.S. without 401(k) plans. Gary Tankersley, head of the core segment of U.S. retirement at John Hancock Retirement, says the plan provider is seeing significant startup growth from such uncovered businesses and expects that to “strengthen” in the next five years.
“As more small and midsized businesses recognize the importance of offering robust retirement plans to attract and retain top talent, we’re expecting the number of startup plans to increase by a notable percentage,” he says. “According to recent industry projections, the volume of new plans could grow by as much as 20% annually, which translates into thousands of new plans each year.”
One tailwind for small business plan growth will come if interest rates continue on their downward trajectory, says Jeff Rosenberger, chief operating officer for plan provider Guideline.
“The interest rate environment plays a role for small businesses in planning for the future and having the capital to add retirement plan benefits,” Rosenberger says, noting that the Federal Reserve’s rate cuts are expected to continue into 2025.
Start Them Up
Payroll and plan provider Paychex found in its own research that more than one-third of small-business employers, 37.6%, offer some type of retirement plan, a jump from 31.7% in 2018, notes Scott Buffington, vice president and general manager of retirement services. That same research found that, since the end of 2019, retirement plan offerings have increased by 9.5% in states where businesses are mandated to have a plan, compared with a 3.4% increase in non-mandated states.
“We are seeing year-over-year growth in new plan starts across the country,” Buffington says.
Paychex itself has booked about 22,000 new plans, either through startup or a transition from another plan, in the last calendar year. Many of the startup plans, Buffington says, are being done through Paychex’s pooled employer plan—which is made up of 90% startups.
Guideline has seen growth, in particular, among its new Starter 401(k) offering made possible from a provision in the SECURE ACT 2.0 of 2022, says COO Rosenberger. The Starter is a simplified plan that, while having lower contribution rates and no company match, is also cheaper to set up and has fewer administrative burdens. Guideline has signed up more than 3,000 since they become available at the beginning of the year.
State mandates, according to Rosenberger’s look at the data, appear to push businesses into exploring private market options, and many arrive at the Starter 401(k). The most Starter 401(k) plans booked by Guideline are in states with mandates, including: California (35% of Guideline’s Starter 401(k) plans), Illinois (6%) and Colorado (6%). In comparison, its traditional 401(k) startup growth tends coincide with larger populations such as California (27%), Texas (7%) and New York (6%).
By the end of 2025, California businesses with fewer than five employees will be mandated to offer a plan. Rosenberger says that will likely drive further plan growth in Starter and solo (also known as individual) 401(k) plans.
Hourly Workers
Another startup plan provider, Human Interest, does not see as much connection to state mandates from the more than 10,000 plan adds it expects to book this year. Rakesh Mahajan, Human Interest’s chief revenue officer, says when he looked at the company’s data on new plan growth, a different trend emerged.
“The big trend for me from an industry perspective … is a disproportionate share of business with hourly workers offering plans—that segment is flying,” he says.
In 2022, about 30% of the people on the Human Interest platform were hourly workers, Rakesh says. Today, it is just shy of 60%, with 70% to 80% of new plans being made up of such workers. The CRO says the shift has come, in part, from a business model that targets all businesses and workers, regardless of expected contribution rates.
“The industry has traditionally focused on assets, as opposed to people,” Mahajan says. “We love all workers, whether white collar or blue collar or hourly—we want to get every truck driver, every retail worker and every coffee shop worker into a plan … not just the salaried people.”
Businesses with these types of workers, he says, are also more open to offering plans now that they can be offered digitally, at low cost and with potential tax advantages.
Jared Porter, co-founder of startup plan provider 401Go, points to yet another trend: advisers getting more engaged with smaller businesses.
He says the state-facilitated plans are a “path of least resistance” for some businesses facing retirement plan mandates. But for the advisers 401Go works through, the mandates are a starting point that allows them to discuss the benefits of a plan and the ease of setup through technology, not to mention the tax incentives via SECURE 2.0.
“It’s a way for advisers to discuss a plan in a way that is not pushy, but is focused on what a plan can do for your business,” Porter says. “Many advisers are hearing that there is this opportunity out there and are shifting their services to meet it.”
Human Element
Porter believes the state programs are just the start of mandating that businesses offer retirement plans, with federal mandates and other programs eventually getting implemented. He says 401Go, working through advisers and payroll providers, will continue to capture that plan growth through an ease and speed of use that legacy recordkeepers are struggling to provide.
“It can take six to eight weeks to get them up and running,” Porter says of those more legacy players. “An adviser doesn’t want to bring that to a client. So we focus on making it easier for that adviser and making sure they get paid as well, so it’s viable for their business. … We like to say we automate everything but the relationship, because you have to have that human connection to make it work.”
Some of those large legacy recordkeepers, including Fidelity Investments, Empower and Principal Financial Group, have built small plan startup programs to try and capture this audience as well.
Mahajan, of Human Interest, believes that, beyond all other factors, worker demand for plan access will drive plan growth. He tells an anecdote of a recent trip to South Carolina, which does not have a state plan mandate, where he noticed two shops looking to hire. One, a cookie shop, was offering free cookies as a benefit. Another, a burger shop, was offering benefits, including a 401(k) plan.
“Everyone loves a free cookie,” Rakesh says. “But there’s an awareness that a 401(k) plan is really what will drive talent attraction and retention.”