2021
PLANADVISER Small-Plan Services Survey

Small Wonders

Plan options that are good for small businesses, profitable for advisers

When one thinks of an employer-sponsored retirement plan, generally 401(k), 403(b) and 457(a) plans come to mind. But these are most useful for medium and large businesses, thus, generally speaking, leaving smaller organizations without some key vehicles for saving.

“Offering a retirement savings plan is crucial in helping employees feel more secure in their financial journey and therefore more secure in their work,” says Jerry Patterson, senior vice president for the retirement and income solutions team at Principal Financial Group in Des Moines, Iowa. “But it’s also important for retaining and drawing talent. This is particularly critical in the current tight labor market.”

New legislation, including the Securing a Strong Retirement Act of 2021—aka the SECURE Act 2.0—would enable millions more workers to build savings through employer-provided retirement plans that offer automatic enrollment or through pooled employers plans (PEPs). Offering such plans to small businesses encourages workers to save for the short and long term, while increasing talent retention.

Putting a retirement plan in place at these small businesses can prove successful for financial advisers. Historically, smaller plans were seen as unprofitable, but that does not have to be the case, says Chad Parks, founder and CEO of Ubiquity Retirement + Savings, a 401(k) provider for small businesses, in San Francisco.

Parks worked as a certified financial planner (CFP) in the 1990s, servicing small-plan clients and, in doing so, noticed the limited availability of retirement plan options and benefits offerings for these companies. Because small-plan clients had fewer assets, he says, many advisers chose not to service them for fear of litigation risk, or because they did not want to invest time or money for a presumably limited return.

He acknowledges that small plans receive more attention today from benefit providers, so have more to offer their participants. But he points to advisers’ ongoing confusion when it comes to servicing the plans. “The industry has evolved, but these questions remain for the typical adviser: How do I work with small plans? How do I do it time- and cost-effectively? And what is my role?”

In the past, individual advisers worked as the sole operator for one plan and, therefore, bore all of the professional responsibilities, including communications, investments and more. In its growth, the retirement plan industry has created fiduciary specialists dedicated to exclusive aspects of retirement planning that advisers can partner with to create a more efficient practice.

One example is working with a 3(38) investment manager. These fiduciary advisers select, manage, monitor and benchmark plans’ investment offerings, consolidating a number of responsibilities that were previously part of the advisory offerings. By adding a partner such as a 3(38), financial advisers can free up time to focus on plan design and work with participants one on one, which can solidify client relationships and grow the adviser’s practice.

Additionally, plan advisers can still charge fees to smaller plans for their services, adds Parks. “All my career, I’ve heard the saying that there is no money in small plans, but small plans often grow up to be big. You may not make it all right away, but if you nurture that relationship, you’ll be helping and adding a valuable service to these plans.”

Adding varied perspectives means business owners are also more likely to reach all or most of the plan goals they want to achieve, says David Flores Wilson, a managing partner in Sincerus Advisory in New York City. “We [alone] are just not going to build up expertise in all of those areas,” he says. “If we’re finding the right advisers who we can bring in at every lifecycle of the business, the business owners can then be closer to the goals they want to achieve.”

Providing services to small businesses is another way to diversify one’s advisory practice while growing the portfolio, says Patterson. Additionally, he notes, using today’s time-saving solutions/products as well as automated plan features can simplify administration, freeing the adviser to focus on generating business.

Consider the Types

When it comes to the types of retirement plans traditionally used by small employers, the savings incentive match plan for employees (SIMPLE)—in either an individual retirement account (IRA) or a 401(k) version—the simplified employee pension plan (SEP) and the solo 401(k) are a trio of options. All three types are effective designs that often require little preparation for a smaller client, says Josh Sailar, who, as a partner in Blue Zone Wealth Advisors in Manhattan Beach, California, works with small-plan employers.

For instance, the SEP is available to any size business and does not have a filing requirement or the same start-up and operating costs as a standard retirement plan. “A SEP is the go-to in terms of the benchmark,” says Sailar. “There’s no need to take on that additional cost complexity.” Further,  small-plan sponsors may find it easier to first offer a SEP, then later to choose a more complex option such as a 401(k).

SIMPLEs require employers to provide a match or make nonelective contributions, says Parks. They also have a lower contribution threshold, $13,500 this year, compared with $19,500 for 401(k)s. For SEPs, contributions may not exceed the lesser of 25% of the participant’s compensation or $58,000 this year.

“Small employers stay away from a 401(k) because they think it’s too complex and believe they must offer a match, but a SIMPLE is just as complex and, while not as expensive, has a mandatory match, which is a cost to the company.”

While Parks believes SIMPLEs and SEPs to be suitable options for select companies, he urges employers to consider a safe harbor 401(k) instead, due to its loan-provision and hardship-withdrawal features. A safe harbor 401(k) is also a qualified retirement plan, meaning it is a protected asset in the event of a lawsuit or bankruptcy filing, Parks says. SEPs and SIMPLEs, however, are also protected plans. 

If an employer does not want to offer a complex plan, it can join a pooled employer plan instead, says Parks. PEPs may be a fitting option for employers and advisers worried about fiduciary risk. They allow a small employer to group its plan resources with those of peers while delegating the responsibilities to a third-party plan provider. A single administrator for all of the plans will package, make available and oversee the benefit offerings, with the employer paying select fees.

For advisers interested in working with small plans, Parks recommends they, first, define their role in the plan and what they will or will not offer. Second, find plan providers to partner with that will have the plan’s best interest at heart, that can achieve efficiencies and take on responsibilities that an individual adviser cannot.

Lastly, Parks says, advisers interested in this space should keep an eye out for SECURE 2.0, which has passed the House Ways and Means Committee but has yet to move to the full House. Not only would multiple employer plans (MEPs) become an option for small 403(b) plans if the bill passed, but tax credits for small businesses would be raised to 100%.

Patterson concurs, adding that most advisers overlook the tax savings opportunities when offering a plan to small businesses. “These savings [would] become even more meaningful with the passage of the SECURE Act [2.0], which was designed to incentivize smaller businesses to set up retirement plans for their employees,” he says. —Amanda Umpierrez

Past surveys can be found here.