Data & Research July 23, 2024

Small Business “Bullishness” Helping to Drive 401(k) Growth

PLANSPONSOR surveying shows some leaders in the new and small plan space booked more 401(k)s in 2023 than the prior year.

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ADP Inc., Guideline Inc., and Human Interest were among the top recordkeepers in adding defined contribution retirement plans in 2023, with all three pointing toward continued growth in 2024, according to the 2024 PLANSPONSOR Recordkeeper Survey and executive interviews.

Recordkeepers overall showed a strong year of DC plan additions—either via startups or by converting from another provider—in 2023, as compared with the prior year. Tailwinds including employer talent attraction and retention needs, SECURE 2.0 Act of 2022 tax incentives and state mandates are all driving new plan growth, according to firm executives, with signs they may outdo themselves again by the end of 2024.

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“We’re continuing to track really well,” says Jeff Rosenberger, chief operating officer for Guideline. “I think we are seeing some evidence overall of small businesses starting to do better and feeling more bullish. … They are looking to hire more employees, and part of that focus is providing a competitive benefits package.”

According to the most recent surveying by the U.S. Chamber of Commerce, 73% of small businesses say they expect revenue to increase in the next year, the highest reading since the start of surveying in Q2 2017. 

Rosenberger, who in his role at Guideline is active in policymaking to expand qualified retirement plan access and participation, notes that bullishness comes from expectations of a drop in interest rates, along with federal incentives and state mandates for DC plans.

PLANSPONSOR, a sister publication of PLANADVISER, gathered information from many of the country’s top recordkeepers in the survey, though not all participated. ADP ranked first with 39,224 new plans in 2023. Guideline came in second at 12,795 plans and Human Interest Inc., the BlackRock-backed 401(k) provider, came in third at 8,617 plans. That firm announced Wednesday that, with the help of some new fundraising, it is positioning itself for an initial public offering “when the time is right.”

Provider How many new DC recordkeeping plans did your firm add in 2023?
ADP 39,224
Guideline 12,795
Human Interest 8,617
Ascensus 6,441
Capital Group, home of American Funds 6,304
Empower 6,224
John Hancock Retirement 5,213
Transamerica Retirement Solutions, LLC (Transamerica) 4,961
Vanguard 2,188
Fidelity Investments 2,093

 

High-Value Benefit

“These achievements are correlated to ADP’s ability to provide high-value workplace benefits solutions for small-to-enterprise-sized employers, along with outstanding sales growth and client retention,” says Chris Magno, senior vice president and general manager for ADP’s retirement services, via email. “ADP Retirement Services has extensive experience supporting this market with low-cost, easy-to-administer solutions with knowledgeable client service teams.”

Magno says ADP supports legislation such as state mandates and the SECURE 2.0 Act to help make saving for retirement accessible for employees and provide incentives for employers to offer a plan.

Paychex provided data separately from the survey that included both individual plan adds and adopting employers into its pooled employer plan. By that count, the firm added more than 22,000 plans in 2023.

“Drivers of growth continue to be an increased need for small businesses to offer a retirement plan to attract and retain highly qualified employees,” says Scott Buffington, vice president and general manager of retirement services at Paychex, via email.

He also notes legislation’s role in plan growth, pointing to tax incentives, state mandates and enhancements in pooled employer plans introduced in the original Setting Every Community Up for Retirement Enhancement Act of 2019, which he says addressed issues of plans being too costly and complex to administer.

Challenges to plan growth, he notes, are small employers’ “general lack of knowledge of PEP and tax credits.” Paychex, he says, is working to educate business owners and industry professionals on the current retirement plan programs and incentives.

“We believe all Americans deserve the right to a secure financial future, and we show that through our products and services, financial advisor and accountant partnership programs, and lobbying in Washington, D.C.” Buffington says, noting a recent example of Paychex helping to introduce the RISE Act, which expands plan startup tax credits available to businesses with fewer than 10 employees. 

Explosion of Plans

Human Interest’s Rakesh Mahajan, chief revenue officer, says the firm will have invested about $150 million by the end of the year toward developing its retirement plan platform for small and medium-sizes businesses; the firm has also brought on more than 200 people for in-house customer support based in Lindon, Utah, which he notes won a customer satisfaction award in 2023.

“The laser focus on offering the highest-rated 401(k) product and customer service remains the core reason we are growing at the pace that we are,” he says. “In fact we are continuing to accelerate that growth and expect to continue to see on average 1,000 new customers joining Human Interest each month,” leading to a forecast of 10,000 new plans by the end of 2024.

About 75% of Human Interest’s customers are offering a 401(k) for the first time, he notes.

Guideline’s Rosenberger says the firm has been seeing an “absolute explosion” of converting plans and new plans, with the firm seeing more conversion plans over the last two years in the higher interest rate environment. That he believes stems from many businesses looking for ways to reduce costs, and to get plans before the CalSavers mandate deadline of June 30, 2022 for employers with five to 50 employees having plans.

He notes that the firm is often poaching from the largest payroll providers; Guideline’s three largest payroll partners are Gusto, Intuit and Rippling, though it has integrations with many others in the market. Rosenberger notes that the firm builds direct integrations with payroll partners through application programming interfaces, not third-parties, which the firm believes “leads to a superior customer experience and reduces costs.”

Another growth driver has been Guideline’s Starter 401(k) program, which builds off SECURE 2.0 legislation that allows for a plan startup with fewer compliance needs from employers, according to Rosenberger. About 15% to 20% of the firm’s new plan signings are coming via that program, he says.

Guideline also ranked in the top 10 for overall DC plans covered in the market in PLANSPONSOR surveying, coming in seventh. ADP, Ascensus, Empower, Capital Group, Principal Financial Group and Voya were the largest recordkeepers for overall DC plan coverage.

Compliance July 22, 2024

5th Circuit Appeals Court Sends DOL ESG Case Back to Texas Court

A challenge to the 2022 Department of Labor ESG rule on 401(k) plan investing returns to a Texas district court without reliance on the Chevron deference.

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A Texas district court will rehear a challenge to the Department of Labor’s environmental, social and governance rule for investing in defined contribution retirement plans after the U.S. 5th Circuit Court of Appeals remanded the case due to a recent Supreme Court decision.

In a ruling published on July 18, U.S. Circuit Judge Don R. Willett cited the Supreme Court overturning of the longstanding Chevron standard, claiming that in initially upholding the DOL’s rule, the district court had relied upon the decades-old Chevron deference doctrine.

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“Given the upended legal landscape, and our status as a court of review, not first view, we vacate and remand so that the district court can reassess the merits,” Willett wrote.

The Chevron doctrine, so-called for its establishment in a 1984 Supreme Court decision, required federal courts to be deferential to federal agencies’ interpretations of ambiguous language. The Supreme Court ruled on June 28 in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al. that the Chevron Doctrine would no longer apply to cases involving rulemakings of the federal bureaucracy, and the court should use its independent judgment instead. 

The 2022 DOL rule—allowing ESG factors to be considered when electing retirement plan investments— is the first case concerning ESG to go before a judge in the post-Chevron era.

Utah v. Su Heads Back to Texas

A three-judge panel of the 5th Circuit heard oral arguments in Utah v. Su in New Orleans on July 9 in the bid by 29 Republican state attorneys general to block the DOL rule.

Craig Leen, a partner in K&L Gates who has experience passing DOL regulation during his time as the director of the Office of Federal Contract Compliance Programs, says the ruling makes sense in light of the new standard established in Loper Bright.

“Now the judge in the district court can exercise independent judgment,” Leen says. “The 5th Circuit specifically wants the judge to exercise independent judgment and determine whether to uphold the rule.”

Leen also argues that Chevron was “significantly relied upon” in the district court decision by U.S. District Judge Matthew Kacsmaryk and, now that Chevron deference has been removed, “the case could go another way.”

The DOL stated in a filing made before oral arguments that it did not rely on Chevron during the course of litigation, writing that “the court should itself resolve the issue of statutory interpretation that this case presents.”

In a March filing, the DOL did reference Chevron, but noted the then-pending Supreme Court decision on the doctrine, writing that “the tiebreaker standard is valid even aside from the Chevron framework, because it is not just a reasonable construction but the best construction of ERISA. … There is no basis for plaintiffs’ view that ERISA requires fiduciaries to break a tie among investments by choosing randomly.”

The 5th Circuit opinion also addressed a concern about rules “ping-ponging” between administrations. Leen explains that when presidents leave office, rules they issued are often changed when a new president comes in.

“I think that’s one thing the district court will consider very carefully: … the fact that you had a [former President Donald] Trump administration rule that was almost immediately replaced by a [President Joe] Biden administration rule,” Leen says.

No More Duty to Defer

The rules issued by both administrations were fairly similar but include some key differences in wording. For example, the Trump administration rule stated a fiduciary must consider pecuniary factors when determining what investments to include in a 401(k) plan. The Biden administration rule similarly said that rate of return needs to be the primary factor when deciding on an investment, but if there are two investments that are basically equal in terms of rate of return, a plan sponsor can consider ESG factors as a tiebreaker.

While ERISA does not mention considering other factors besides rate of return when making investment decisions, courts were previously bound to, under Chevron, defer to a reasonable agency directing fiduciaries to consider ESG factors as a tiebreaker. Now that Chevron deference has been overturned, Leen says there is no duty to defer.

“What the court will do is look at the rule, look at the support for the rule and the fact that [it] changed very quickly, and make a determination whether that was within the authority of … the Department of Labor to [pass],” he says.

Going forward, Leen predicts that any existing cases that have relied on Chevron deference will likely be sent back to lower courts to allow district judges to exercise their independent judgment. The 5th Circuit stated in its opinion that when there is a change in the law, such as the one in the Supreme Court’s Loper Bright ruling, and an appeal is pending, the appellate court has to consider the Supreme Court’s change.

In terms of any existing decisions in which Chevron deference was applied, Leen says litigants may go to other circuit courts where there is not a binding precedent in place and challenge those rules, because the Supreme Court has ruled that the statute of limitations for challenging the rule runs from the time of injury to a new potential litigant.

“I think for existing cases which have been upheld by Chevron, but are already closed [from] maybe five, 10, 15 years ago, there’s still a chance that those rules may be challenged,” Leen says.

Leen says it is likely that Congress will start writing more specific laws and be clearer in specifying its intentions, recognizing it cannot keep guidance ambiguous and rely on an administrative agency to interpret it.

“When you look at all of this together, I think you’ll see the courts enhancing authority of the president, of Congress and of the courts … at the expense of administrative agencies,” Leen says.

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