Small employer 401(k)s can be big business for advisors

Small businesses have great opportunities for financial advisors—especially when it comes to helping them offer 401(k) retirement plans to their employees.

A a new study from Westwell, a New York-based company for archiving employer-sponsored retirement plans, found that many smaller employers were upgrading their 401(k)s and looking for professional advice on how to do it. Of the 250 companies surveyed by Vestwell — most of which had fewer than 100 employees — 44 percent said they plan to make changes to their 401(k)s this year, including by increasing matching contributions, adding automatic enrollment and other corrections.

This is good news for advisers because employers want their help in implementing these changes. Fifty-seven percent of firms say an advisor “adds value” by consulting on plan design. Another 65% say they want advisors to make investment recommendations.

Small businesses are America’s economic engine. Small Business Administration Data show 32.5 million such companies in 2021, employing more than 61 million people in 2021. This is 99.9% of all enterprises in the country and almost half, or 46.8%, of all workers. Small businesses generate around 44% of all US economic output. Yet nearly three in four businesses, or 74%, do not offer a 401(k), According to National Association of Planning Consultants.

For wealth management professionals, this all boils down to one thing: lots of potential new business.

“Financial advisors have an incredible opportunity to leverage industry momentum to grow their own practice,” said Aaron Shum, CEO of Vestwell. “It’s clear that small business owners are seeing the value that a financial advisor’s expertise can bring to their business.”

Education should also play a big role: 54% of employers want advisors to train them on plan administration, and 62% want them to teach employees about their 401(k)s. In fact, nearly half, or 47%, said that training employees is the most valuable thing an advisor can do. Workers care too – 90% of employees said they want their companies to provide retirement training.

“Think about a small business — rarely will there be a benefits team,” Shum said. “So they turn to the advisor, which essentially becomes an extension of the small business’s leveraged arm.”

In the United States, a 401(k) is the most common type of employer-sponsored retirement plan. In total there are approx 60 million active 401(k) participants, with a combined $7.7 trillion in assets — 70% of total savings across all direct contribution plans, according to Institute for Investment Companies.

Vestwell expects those numbers to grow even more. One main reason is SECURE 2.0, a pension reform package that Congress passed late last year. Among other measures, the law mandates automatic enrollment in all new 401(k) plans beginning in 2025 (except those of churches, government agencies and businesses with fewer than 11 employees). This can make a big difference; one Vanguard survey found that auto-enrollment tripled the number of new hires who signed up for their plans, from 28% to 91%.

Meanwhile, small businesses, generally defined as those with fewer than 500 employees, are making their own efforts to get their workers to sign up. Of the employers surveyed by Vestwell, 41% increased their contribution rates, 31% introduced auto-enrolment and 18% relaxed their employee eligibility criteria.

If all these efforts succeed, Vestwell believes small businesses could become a source of new clients for advisers.

“When employers expand their benefits, advisors expand their practices,” the study said. “In other words, the small business market is about to become big business.

Many people in the industry already see this potential. In its survey of nearly 500 advisors, Vestwell found that 40% expect their practice to grow significantly as small businesses expand their plans. For Shum, the takeaway from all this data is simple:

“Don’t overlook small businesses,” he said. “Everyone needs to think about how to engage with the small plan market because it’s growing very, very quickly.”

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