However daunting it may seem for advisors to add a retirement plan business for their clients, the reasons for doing so in 2023 are more compelling than ever, according to Los Angeles-based Capital Group.
A retirement plan business offers resiliency to a financial advisor, even in times of great volatility, because employee participants usually continue to make automatic payroll contributions, which leads to a steady inflow of assets for advisors to manage, said Renee Grimm, a retirement plan division manager who works for Capital Group in the New York area.
“Very, very few people make withdrawals or even stop making contributions,” she said, adding that even in 2009, at the worst of the global financial crisis, only 2.7% of retirement plan participants stopped contributing or took money out of their plans.
“That for many of you may seem like a pretty stark contrast to what you see in your wealth management book of business,” Grimm said at a virtual event last week, addressing those advisors considering adding retirement plans to their business. “Retirement plans can really help stabilize that volatility and free up more time for you to spend with your wealth clients.”
What’s even better is that when an advisor runs a retirement plan, those employees come to know the firm and might offer more direct wealth management opportunities when they have built wealth or unwound the retirement assets later.
Helping them out is the Secure 2.0 Act of 2022, which included new opportunities for investors to take advantage of retirement plans. With its new incentives, the legislation is prompting small business owners to offer retirement plans for the first time, and many of these business owners are likely already advisory clients, Grimm said.
Secure 2.0 included 92 provisions intended to give employees more access to plans by removing their barriers to entry, Grimm continued. One of those provisions is that employees are automatically enrolled by default instead of being required to opt in.
“Secure Act 2.0 has definitely opened up a huge opportunity,” said another speaker, Sam Gumma, a Capital Group wealth management consultant based in West Bloomfield, Mich. The legislation, he said, has “created a substantial new startup plan tax credit based on contributions the employer makes on behalf of the participants. And it’s also expanded the existing startup tax credit on the employer out-of-pocket plan costs.”
For smaller plans with 50 or fewer employees, the new plan tax credit allows for 100% of the contributions that an employer makes for any employee earning less than $100,000, up to a $1,000 tax credit, Gumma said. And the expansion of the existing plan cost credit means that now 100% of the eligible plan costs for the employer with 50 or fewer employees is eligible, when in the past it was just 50%.
“Together, they can be a significant benefit to the business owner or to the business that’s starting the plan. If I were an advisor today, I think it’d be a great conversation, a value-add conversation, to have with your business owner clients, and also your CPA relationships,” he said. “I’m surprised that there are many CPAs who don’t know about this, and for an advisor to bring that value-add to that CPA and their business owners would be a huge win.”
Retirement plans don’t have to make up most of an advisor’s business to be successful. Capital Group’s “Pathways to Growth: Advisor Benchmark Study” for 2023 found that the practices with the highest growth last year had 25% or more of their assets under management coming from retirement plans.
“For a long time, the generalist advisor has tended to shy away from this retirement plan business and left it to the so-called retirement plan specialist. However, today, the most successful advisors that I work with on the wealth management side also do retirement plan business,” Gumma said. “It’s not really as complex as one may think. And once you get one, maybe two plans under your belt, that third one’s easier.”
The Capital Group team suggested advisors start small, on-boarding just two small plans a year—a new plan with about 30 participants and then a similar-sized, already-existing plan, with around $2.5 million in employee assets. If an advisor did that every year for 10 years, the aggregate would be 600 new retirement plan participants and a $60 million boost in assets to the firm, they said.
Brandon Kennedy, president of Troy, Mich.-based Kennedy Financial Group, agreed with the strategy, saying this was exactly how his firm built this side of its business, though he didn’t know it at the time.
“We did it, actually, in about six or seven years. I wouldn’t say we had a clear strategy behind doing it. We sort of jumped in, got a few plans, got some referrals, and did it in six or seven years,” he said. “I think what we’re really excited for is the number of participants. That’s not something to sleep on.”
Kennedy said his firm now has an additional 600 names to market to, all of whom have 401(k)s, all of whom will retire or change jobs at some point, and some of whom will need a financial advisor.
“We’re just starting to scratch the surface where we’re seeing some of that business that comes from building just a strategy around retirement plans,” he said. “For us, it really became a strategy in the last, maybe, four or five years to continually add new plans and new participants, and play the long game on what that can mean for a practice.”
And it’s all within reach of the average advisor, he said.
“If you have a retail practice, you probably have a handful if not a lot of business owners. And I think it’s a mistake to say, ‘Oh, I don’t handle that, let someone else, or do that on your own,’” he said. “I was not an expert in that field. Right? But what I’ve found is, if you show up, you stay engaged, you do plan reviews, you just do what I would say is the bare minimum; it’s what a lot of other advisors are not doing.”
Since business owners talk to other business owners, referrals come organically.
“That’s not even prospecting. That’s just doing your job and getting some business,” he said. “You just build some relationships by showing up, doing the financial wellness and education. And that can help grow the retail, the wealth management end of the practice as well.”