Small Plan Growing Pains

In a panel hosted by the National Association of Plan Advisors Tuesday, a group of advisers and recordkeepers met to discuss the “big opportunities” around small plan creation and the opportunity to close the coverage gap for 57 million workers.

But, as the group discussed, in the case of small plans, growth in numbers is not necessarily a slam dunk for advisory firms.

“Something I find interesting is the use of the word ‘exciting’ and ‘small market’ in the same sentence,” joked David Montgomery, director of retirement investment services, OneDigital.

The plan adviser went on to discuss some of the challenges of servicing small plans, which can bring in lower revenue but often requires the same amount of work as a large plan in terms of guidance and servicing. Montgomery went on to say, however, that advancements in technology, regulatory changes and the way advisers operate their business are all making small plan coverage more attractive.

“There’s a variety of new pieces of the puzzle that are making it a bit more clear and viable for [advisers] to be comfortable and serve this underserved market,” he said.

Montgomery and the other panelists went on to note advancements, including pooled employer plans, regulatory changes that encourage plan creation, and financial technology advancements ranging from the use of artificial intelligence to more seamless payroll integration.

Joe Smolen, executive vice president, core and institutional markets, Empower, noted a recent Cerulli Associates report forecasting that the 401(k) market would grow from about 668,419 total plans at the end of 2022 to nearly 1 million by the end of the decade. Smolen, whose Empower recently launched a small plan 401(k) startup solution called Ready Select, said the opportunity is there, but the industry has to be ready for it to serve the market.

“Are we as an industry prepared for that growth?” Smolen asked the audience. “Whether you are a DC specialist that is in this market or you’re a wealth adviser, the opportunity is presenting itself for both practices.”

Problem Solving

In a separate interview on the sidelines of the conference, Sean Jordan, head of core and middle markets for Retirement and Income Solutions at Principal Financial Group, called the plan coverage gap a “huge problem to help solve.”

Jordan noted that many of the millions of businesses without a retirement plan don’t know about the tax incentives from SECURE 2.0 that will help fund a plan for at least three years.

“It’s a little like field of dreams—you can build it, but it doesn’t mean they will come,” he said. “It’s part of the equation.”

Jordan noted when Principal created its small plan offering, some key areas of focus were simplicity of sign-up along with speed, a priority for a small business.

“Think of the business with ten employees,” he said. “That person doesn’t have a benefits person or a payroll person—it’s them. They are the business owner and they are wearing many hats.”

The recordkeeper’s small plan offering for businesses with fewer than 100 employees, Simply Retirement, currently has about 2,300 plans and $200 million in assets under administration since it launched in 2020, though the firm has added about 8,000 startup plans in total in that time period through other business lines. 

“We’re building a lot of relationships with our distribution partners like some of the advisory firms,” he said. “There is some alignment of strategies there—they’re saying ‘how do we help some of our advisers serve the small plan market?’ …. we can tailor our offering for advisers who are trying to chase the same opportunity.”

Economic Bedrock

Mike Dullaghan, director of retirement sales execution, Franklin Templeton, speaking to plan advisers in the panel session, noted that the plan advisory business to provide American workers with a workplace plan to help them save for retirement.

“Why do most of us come to this conference and do what we do? Because we believe that every American family deserves a chance to reach financial independence,” he said. “How do they get there without a workplace plan? They don’t. So our ‘why’ is messed up for about half of American workers if they don’t have a workplace savings plan.”

Dullaghan said he sees opportunity in the small startup plan market because it’s an opportunity to finish the job of getting workers into qualified retirement plans.

“What makes me excited is, as we think about all the success that this industry represents, and you think about what’s coming over the next ten years, the statistics would say we are halfway there,” he said. “We’re halfway to covering as many American workers as possible with a workplace savings plan, and if you think you’ve changed lives so far, guess where the majority of these uncovered workers work? They are the bedrock of America’s economy.”

The problem, however, is that it doesn’t look possible to double the number of advisers to cover this space, Dullaghan said. To help solve that issue, he said, advisers need to get comfortable and even “addicted” to fintech companies and resources that can help with plan sign-up and management.

“We need fintech to help us do what needs to be done,” he said. “If you’re not addicted to at least two or three fintech companies, you better get addicted, and you better get addicted quick, because we are going to need your help.”