‘Exploding Market’ for 401(k)s May Help Shrink Coverage Gap

According to research released Tuesday by payroll and small workplace plan retirement provider Paychex Inc., less than half (37.6%) of U.S. employers offer a retirement plan.

That figure considers all businesses in the U.S. and varies by industry. Manufacturing, for instance, offers near half of its workers (49.5%) retirement plans, with leisure and hospitality at the bottom at just 22.2%.

While those numbers are dispiriting for many, some in the retirement industry see opportunity to close that gap, particularly with relatively new opportunities stemming from provisions in the SECURE 2.0 Act of 2022, state mandates, pooled employer plans and advancements in technology that can help advisers sign up more clients with small businesses.

One thing retirement providers, advisers and the industry overall are “aligned around” is “solving the coverage gap,” says Jason Crane, head of core retirement for Ascensus, which offers options ranging from tax-advantaged solutions via advisers through institutional partnerships with firms such as the Vanguard Group, to plans created via banks, credit unions and small businesses via Simplified Employee Pension plans or Savings Incentive Match Plan for Employees—SIMPLE individual retirement accounts.

“To us, fortunately, because we are relatively agnostic as to the vehicle … we want to find a way to reach as many of these employers as possible,” Crane says. “Then we want to present them with solutions that help to diminish the foremost reasons for why they haven’t created plans in the past—and those would be the administrative burden and the expense of doing so.”

Some of that plan creation has already been ramping up speed. In 2021, the 401(k) market included 621,473 plans, a figure that jumped to 720,902 in 2022, according to the 2023 PLANSPONSOR Recordkeeping Survey. PLANSPONSOR, like PLANADVISER, is owned by ISS STOXX.

Even so, that figure is poised to grow substantially, according to comments made by representatives of Paychex and partner Broadridge Financial Solutions Tuesday during a webinar regarding small plans.

“A lot of times, in the past, recordkeepers didn’t want to recordkeep small plans,” said Timothy Slavin, a senior vice president of retirement at Broadridge. “Technology has changed all that. The old cop-out that ‘I can’t make money on small plans because of the expense and technology’ is gone.”

Slavin spoke to three key areas he sees as driving plan growth:

• The labor market needed to attract and retain employees;
• Incentives created via SECURE 2.0 for both employers and employees; and
• The increase in state retirement mandates for businesses.

“It’s a perfect storm for an exploding market,” Slavin said.

Adviser Know-How

Michael Nash, a channel manager for retirement for Paychex, noted on the call the opportunity for financial advisers to provide 401(k) opportunities to clients with small businesses. He highlighted SECUR 2.0 tax incentives that can make a plan free for the first three years, along with state mandates that are driving plan need and growth not just in those states, but as a knock-on effect in other states, according to Paychex data.

“This is an opportunity for you as advisers to really go out there and hold [the plan sponsor’s] hand through this process,” he said. “For advisers who don’t offer small-plan services, clients may start looking elsewhere.”

Both Paychex and Broadridge were selling their small plan solutions and services to advisers on the call.

But Crane of Ascensus likewise noted the importance of financial advisers in boosting small plan creation and uptake. The retirement executive said many of Ascensus’ efforts are going toward driving awareness of and information about areas such as SECURE 2.0 to advisers to show them the value of adding retirement plan options and information to their practices.

“Many of the advisers we work through are primarily wealth management advisers, not retirement-centered advisers,” he says. “They are counseling the small business owner and might not yet be familiar with the virtues of any number of defined contribution plans, let alone cash balance and other vehicles that would allow their owner-clients to save more in a tax-advantaged environment.”

PEP Potential

Crane, recently named to head the firm’s core retirement group in a restructuring, also stressed the role of PEPs, which were created through the Setting Every Community Up for Retirement Enhancement Act of 2019, in furthering plan growth.

“We’ve been really pleasantly surprised by how accelerated the interest, awareness, comfort and, ultimately, adoption of those vehicles has been,” he says. “We essentially doubled our business from 2022 to 2023 in pooled plans and expect to nearly double it again in 2024.”

That growth, he says, comes in part from mitigating both cost and fiduciary liability for plan sponsors. But it is also due to the efficiency and ease with which advisers can distribute the vehicle to small employers.

“There’s a single, pre-fabricated fund lineup, there’s a single cost structure, there’s typically some variability in plan design, but not so excessive that they need to have extensive counseling sessions with plan sponsors around provisional adoption,” Crane says. “As a result, it’s a balance of the virtues that it affords to the employer, but also the virtues that it affords to the adviser to help them grow their retirement practice.”

It’s not all just about plan startups, however. Crane notes that success will also depend on participants being enrolled and engaged with retirement plans and other benefits. Some of that will be done through automatic provisions that default people into plans. The added engagement will come in part through using new features, some authorized by SECURE 2.0, such as student debt payment matching in 401(k) plans or enabling employer contributions as Roth savings.

“There are more and more things that we are building toward and promoting that we think will not only enable employers to establish plans but, more importantly, inspire employees to join and invest in those plans,” he says.