Niche retirement savings markets make up a small part of retirement assets but provide a wide range of opportunities for the financial advisor to build business, says a new report, The Cerulli Edge: Retirement Edition.
Niche markets total $1 trillion in assets, compared to $14 trillion in more traditional defined contribution and defined benefit plans and IRAs. Cerulli identifies six niche markets affecting much smaller groups of people that offer "burgeoning areas of growth and asset-gathering potential for firms willing to look beyond the crowded mainstream retirement markets," says Cerulli.
Retirement plans that include employees from more than one employer, known as Taft-Hartley plans that are often based around unions within an industry, have held their own in recent years and make up $419 billion of the defined benefit market. However, they are at a disadvantage because of a built-in prejudice by some of them against foreign investments. Advisors can use the opportunity to convince Taft-Hartley plan sponsors to expand to international market investments to help the segment grow, the report concludes.
A second niche market are nonqualified deferred compensation plans, often used as a tool in recruiting and retaining executives. Increased regulations, poor economic conditions and low tax rates have combined to create an environment that does not favor growth in these plans. But Cerulli says financial advisor firms in the corporate-owned life insurance market are in a good position to capture business from those with nonqualified deferred compensation. Corporate-owned life insurance, in addition to mutual funds, are the two primary investment vehicles used for this niche market.
Advisors have an opportunity to gain part of the government employee and not-for-profit retirement market by emphasizing the advantages of 457 plans that supplement defined benefit plans for government workers and 403(b) plan participants. Plan assets have grown steadily to $189 billion (except for a dip in 2008) but a strong economic recovery is needed to make 457 plans truly attractive. In the meantime, asset managers, can develop focused marketing efforts to relay the benefits of 457 plans as a way to increase retirement savings.
A very small number of people use 412(i) plans, but the market can be lucrative, says the report. Most often used by business owners who own the business by themselves or with a small number of other people, the plans have to be fully funded using annuities or life insurance. The contributions are tax deductible for the business and often pushed as a tax benefit. Asset managers should also promote 412(i)s as a way of supplementing owners' retirements. Focusing on these kinds of plans is a way for advisors to work with highly compensated, late-career professionals, which is an attractive client base, Cerulli points out.
Only a small group of people participate in IRAs for those still working, but this provides an area of growth for advisors, says Cerulli. In addition, Solo 401(k)s, the newest offering for sole proprietors, are growing in number and will probably continue to do so as Baby Boomers work past retirement age and seek the felicity of a sole-proprietorship arrangement while continuing to save for retirement. These two niche markets should not be ignored by asset managers because they provide potential to enhance retirement asset gathering, Cerulli advises.