Large employers’ retirement plans usually lead the way in terms of plan design and employee participation for several reasons. First, large companies are more likely to offer any plan at all than smaller ones, leading to a “coverage deficit.” Second, large plans have more assets, which generate greater competition among plan support vendors to land a plan’s business and implement innovative features.
According to a recent white paper from Ascensus, “In Focus: The Small Business Opportunity,” it’s not just a question of reduced employee coverage in small businesses; large companies also have a distinct advantage in plan design, quality and cost. Rick Irace, chief operating officer, retirement with Ascensus, cites several points as evidence of a “quality deficit” among small plans. The first point is the differing adoption rates of auto-features. Among plans with over $100 million in assets, the utilization rates for auto-enrollment and auto-escalation are about 70 percent. Rates drop dramatically for plans with less than $1 million, he says. “They have, on average, a 16 percent utilization rate of these auto-enrollment features and they actually have a 12 percent utilization on the auto-increase,” he says. “As you move upmarket, we see that plans between $1 million and $5 million in assets, they’re going to have a slightly higher utilization of both of those, so respectively a 21 and 14 percent utilization.”
Plan participation rate is another informative metric. Employees at larger businesses are much more likely than their small-business peers to enroll in their employers’ retirement savings plans. “To give you an example, those companies that had, let’s say, 1 to 49 associates, they had a 34 percent participation rate, and at 500 (associates) or more, it jumps to a 76 percent participation rate,” says Irace.
The good news is that several positive trends among large plans’ best practices are influencing small-business plans. Auto-features are becoming more common and target date funds are gaining traction, for example. Financial wellness programs are also moving downstream, improving participants’ finances and recognition of their retirement plans’ value. The Ascensus white paper notes that “market forces, network effects and rapid technological evolution are systematically reducing both fixed and variable costs, allowing quality design to migrate” to smaller plans.
Several emerging public policies could also influence the small-plan market. The white paper reports that several states have initiated “government-facilitated auto-IRA plans” for employees in businesses without 401(k)s. An extension of multiple-employer plans (MEPs) to companies that don’t currently qualify for a MEP could allow some employers to reap the benefits of scale that larger plans enjoy
Nonetheless, getting small businesses to adopt higher-quality plans is both a challenge and opportunity for advisors. Most small-business owners lack the time and requisite expertise to understand retirement plans’ intricacies. Irace contrasts his prior experience working with jumbo plans that had their own ERISA attorneys plus full-time benefits and finance staff to a friend who owns and operates a bakery. “It is the small-business owner that turns the lights on in the morning,” he says. “In my friend’s case, he’s making the dough in the morning, he’s making the cupcakes and the cake, and at the end of the night, he’s shutting off the lights and doing payroll, and he’s trying to be a fiduciary.”
Those constraints on small-business owners create opportunities for advisors. Irace believes that by teaming with a third-party administrator (TPA), an advisor can install plans and service participants without significantly increasing the business owner’s administrative workload. Advisors are a “crucial linchpin” in helping business owners evaluate and select a plan, he maintains. “By consulting with their clients, advisors can help them identify the service model that they should use, (and) the advisor is a big help in the cost structure that the plan should use,” he says. “I love when the advisor can put a full range of product in front of a client from an IRA to perhaps an Individual(k) to a SEP or a SIMPLE to a full blown 401(k).” (The Individual(k) is a 401(k)/profit-sharing plan for small-business owners offered by Ascensus.)
A TPA can assist with plan design, implementation and administration, Irace adds. “I do think that for the sponsor that’s really concerned about administrative burdens and other things, the TPA can just step in and consult on specialized plan design,” he says. “They can talk about technical details in a way that’s much easier understood for the sponsor and their employees and I think, again, for those small businesses that are worried, when you have a TPA and an advisor together, I think that’s a big win.”