Bipartisan legislation is now under consideration by Congress to make it easier for small businesses to offer 401(k)s and other retirement plans for employees. The bill is intended to streamline federal filing requirements, cut red tape and reduce costs for small businesses that join together to create a common retirement plan.
It’s the latest development in a broader effort by Congress and the financial services industry to help make it easier and less expensive for small businesses to sponsor retirement plans and potentially make them more widely available to more workers. In today’s marketplace, the smaller the company, the less likely its employees are to have access to a 401(k) or similar retirement savings plan or participate in a plan if they have access, according to a 2016 report by the Pew Charitable Trusts, “Who’s In, Who’s Out.” For example, only 22 percent of workers at firms with fewer than 10 employees report having access to a workplace savings plan or pension, compared with 74 percent at firms with 500 or more, Pew reported.
The scarcity of retirement plans sponsored by small businesses is an opportunity for financial advisors to make a difference, providing they understand the special needs of small businesses and have the necessary support and resources. Advisors who are most successful in the small-plan market typically focus on what small businesses identified as being most important in MassMutual’s 2016 Winning Combination study: helping reduce costs, educating employees on retirement savings, providing outstanding service and offering fiduciary support.
Reducing Costs
More than half of small-business owners who did not offer a plan cited cost as the biggest reason, according to a 2013 Main Street Alliance/American Sustainable Business Council survey from 2013. Setting up a retirement plan generally includes both fixed costs and a marginal cost for each employee who participates, which means that smaller employers often contend with larger fixed costs on a per employee basis than larger firms.
Small employers with less than $25 million in retirement plan assets under management say they find advisors who can help them reduce their costs as especially valuable, MassMutual learned in its 2016 Winning Combination Study of what employers most want from a retirement plan advisor.
Employers or plan sponsors that do not currently work with a financial advisor emphasize reducing plan costs far more than firms that currently work with an advisor, MassMutual’s study found. Once an employer partners with an advisor, though, they typically focus on other issues such as their fiduciary responsibilities.
Advisors say that providing good service and building a relationship with sponsors is far more important for retaining rather than winning business. The insight is that many employers don’t know what they don’t know; working with an advisor helps educate employers on their broader responsibilities and opportunities. Call it right-sizing retirement.
Educating Employees
Smaller employers tend to value retirement education for their employees somewhat less than larger firms. In fact, the larger the employer, the more likely the firm is to want an advisor to help educate employees semiannually or more often.