Effectively Serving Small Solutions
Art by Dalbert B. Vilarino
The popularity of legislation aiming to expand retirement plan coverage to more small-business employees and to the self-employed directly reflects the seriousness of the retirement plan coverage crisis that confronts these substantial sectors of the U.S. workforce.
As noted by Roger Ferguson, CEO of TIAA in New York City, there are three components to the retirement crisis—a coverage gap, a savings gap and a guaranteed income gap.
Among employees offered a workplace retirement plan, the system functions quite well, especially as to the first two components, says Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA) in West Palm Beach, Florida.
“But we have to continue closing the retirement savings coverage gap,” Minsky says. “We need to broaden the pool of people who have access to workplace retirement savings plans.”
DCIIA is a strong supporter of a number of different solutions to the coverage gap, but Minsky says the “open” multiple employer plan—or open MEP—idea is particularly exciting.
“In our experience, there is near-universal agreement that open MEPs are a good idea, so this is an idea whose time has come,” Minsky says. “We just need to get it done, with the support of the government or without.”
Minsky suggests that an “and, and, and” approach will be best here, and he mentions extending coverage to part-time workers and considering state-based savings opportunities, as well.
Today, roughly half of Americans are offered a workplace retirement plan, Ferguson says. This means that those without one will be totally dependent on after-tax savings and Social Security, which he contends will not be enough. For that reason, employers of all sizes that currently do not offer a plan need to seriously consider doing so, he advises. Employers have numerous pathways by which to implement retirement benefits, he observes; the key is to make the commitment, based on the understanding that providing a plan helps both the employer and those employed.
Cost Misconceptions and 401(k) Myopia
Data gathered by SCORE, a nonprofit provider of consulting services to U.S. small businesses, show that 34% of small-business owners have no formal retirement savings strategy, even for themselves let alone for their employees. Also troubling, the smaller the staff a business has, the less likely it is to have a retirement plan for its employees. Indeed, only 28% of businesses with fewer than 10 employees offer those employees a retirement plan, while 51% of businesses with 10 to 24 employees do.
According to SCORE, 71% of businesses without a retirement plan reported that plan setup is too expensive, and 63% said they have inadequate resources to pay for plan administration. Half contended their employees are not interested, although SCORE found that 48% of employees who had recently left a job said a lack of retirement benefits influenced their decision to quit.
SCORE’s data suggest that small-business owners may change their tune if they learn that retirement savings cost the employer only 2.4%, on average, of a worker’s annual compensation, and that a retirement plan supports employee recruitment and retention. Ninety-four percent of small-business owners who already offer a plan report that it significantly adds to their company’s appeal.
By keeping such facts in mind, says Kevin Boyles, vice president and business development director for Millennium Trust Co. in Oak Brook, Illinois, advisers can address the knowledge gap that exists among this group and contributes to the coverage gap.
Citing his own firm’s research, Boyles observes that 66% of small-business owners agree with the blanket statement “Retirement plans are too expensive.” As a result, 45% of small companies have not formally researched the cost of any type of retirement plan.
According to Boyles, the majority of leaders at small businesses who had investigated plan sponsorship had considered only 401(k) plans, which tend to have higher costs than other plan options, such as simplified employee pensions (SEPs), individual retirement accounts (IRAs), Savings Incentive Match PLans for Employees (SIMPLE) IRAs, or payroll deduction IRAs. Only two in 10 had sought any information about SIMPLEs, SEPs, payroll deduction IRAs or other plan types designed specifically for smaller businesses, Boyles says. Those options tend to have lower costs than 401(k) plans and are easier to administer.
Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies in Los Angeles, observes that less than 10% of the self-employed currently use a SEP or a SIMPLE IRA.
“It’s a surprisingly low take-up, given that these are powerful vehicles for people in this situation to actually generate tax-advantaged dollars for their retirement,” Collinson says.
“Interesting too is the wider conversation about the SECURE [Setting Every Community Up for Retirement Enhancement] Act and open multiple employer plans,” she says. “A lot of savings options such as SEPs and SIMPLE IRAs are already available for small employers and the self-employed, but they aren’t being taken advantage of. So it goes to show that things like open MEPs will need strong advocacy to make a difference for the self-employed and the small-business community. Advisers will have to drive the adoption of these plans among this group.”
Simplified Services and Outsourcing
Jamie Ohl, president of retirement plan services at Lincoln Financial Group in Philadelphia, stresses that offering a retirement plan “doesn’t have to be complicated.”
“It only takes a conversation with a financial adviser and a few simple decisions for a small-business owner to set up a new plan or enhance the one it offers today,” Ohl says.
In its own surveys, Lincoln Financial has found that over two-thirds of small-business owners are worried about having the resources to administer additional benefits. The firm recommends that they meet with a financial adviser to help them find the best solutions for their company, as well as to help with tax implications and plan design.
According to Ohl, advisers can also help small-business owners assess current benefits, assign value to new benefits, and administer the plan plus educate employees about its benefits. For potential clients that are especially hesitant to increase their benefits spending, the advisory relationship could begin with per-project, flat-fee arrangements.
“Financial advisers and plan providers such as Lincoln can help by serving as a consultative partner,” Ohl adds. In this role, the adviser “helps small-business owners understand solutions and make the right selections based on their employees’ needs and helps them educate the employees.”
Reflecting on the topic of serving small—or actually any—plans efficiently, Matt Matrisian, senior vice president of strategic initiatives at AssetMark in San Francisco, says outsourcing to firms that specialize in adviser back-office support technology is a great strategy. This way, the adviser can boost his value proposition while also securing the operational efficiencies he must build into his business to survive profitably, long term. This is especially true in the realms of compliance, and general operations for performing investment due diligence and determining mutual fund recommendation suitability—all of these are ripe for outsourcing to third-party firms that have the appropriate skill sets and resources.
“Supporting this outsourcing is what AssetMark does at its core, so I’m coming at this from a certain perspective, but I believe many advisers will continue to draw the conclusion that outsourcing is becoming a smarter way to go in these areas,” Matrisian says. “It’s all about getting the proper tools in place, the right customer relationship management solutions and procedures.”
If advisers can build proper workflows around the outsourced services, they will be amazed by just how much time and effort they can save per client, Matrisian suggests. This can free the adviser, whether the plan is small or large, to attend to what matters most: relationship management and defining and proving the value proposition.
“Advisers must move away from spending time and effort on the repeatable and outsourceable tasks that might previously have been the focus of a traditional advisory business,” he recommends. “At AssetMark, we are helping advisers build out and demonstrate their value proposition, structured around a goals-based financial planning approach. And then, of course, we are focused on helping them add value to the client relationship through quality service support. We see clear evidence that when advisers can do both of these things effectively—add value and demonstrate the value—they can achieve strong and sustainable growth.”