The Setting Every Community Up for Retirement Enhancement (SECURE) Act as well as emerging state-level initiatives could spur growth of the small retirement plan market, and recordkeepers that have been vying for business in the mature large and mid-size plan market are taking notice of a new opportunity.
The small retirement plan market has plenty of room to grow, according to a recent Cerulli Associates retirement report. The firm pointed to research by JP Morgan that suggests less than half of small businesses with $50,000 to $20 million in annual revenue and five to 50 employees offer a 401(k) plan. Nearly two-thirds of smaller employers that do not offer a plan also do not expect to offer one in the future, citing the costs associated with administering a plan, according to the research.
However, that is changing thanks to multiple employer plans, association plans, Savings Incentive Match PLan for Employees (SIMPLE) plans and Simplified Employee Pension plans (SEP-IRAs).
Those plans, along with new state-level action and the federal SECURE Act, are designed to break down the barriers that are keeping small employers from offering retirement plans.
Of note, the SECURE Act created a new category of plans — Pooled Employer Plans or PEPs — that allow employers to share costs, manage risks and offload administrative duties associated with sponsoring a plan.
Cerulli’s research indicates recordkeepers are taking a cautious view of PEPs, with only 11 percent viewing them as a significant growth opportunity and 39 percent seeing them as a moderate growth opportunity. However, PEPs could be a compelling option for small employers looking to recruit and retain high-quality employees, said the report.
For these employers, PEPs could provide the lower fees, access to services and administrative help they need to make the decision to offer a plan. Cerulli said the challenge for recordkeepers who want to target this market is communicating the potential benefits to skeptical potential plan sponsors.
State-sponsored retirement plans (SSRPs) are another development that could change the small business retirement plan landscape. Nearly all states have either adopted or are considering SSRPs, and California, Illinois and Oregon have mandated that employers either offer their own retirement plan or enroll their employees in a state plan. In those three states, total SSRP assets tripled in just one year, said Cerulli. As more states launch mandatory SSRPs, the marketplace for recordkeeping services could begin to see a solid base of plans, the firm said.
Plan sponsor acceptance of SSRPs has been promising, said Cerulli. SSRPs can even serve as a training ground for smaller employers, allowing them to become accustomed to offering such benefits before graduating to more complex retirement plans as the organization and its plan assets grow.
If recordkeepers are to be effective players in the small business space — where options have been available but uptake has been hit or miss to date — they will have to lay the groundwork for working with a likely less sophisticated pool of plan sponsors, said Cerulli. For example, small employers may think 401(k) plans are the only option available and are primarily concerned with the cost and complexity involved with offering a plan. Part of the recordkeeper’s job when entering the market will be to help prospective plan sponsors figure out which plan best fits their needs.
Recordkeepers also should keep an eye on the growth of their clients’ workforce and the resulting evolution of the plan needs. Even if businesses remain small, their retirement plans will likely grow over time in terms of plan assets, which makes them more complicated to administer, noted Cerulli. Among the potential pitfalls of growing retirement plan assets is the potential for class-action lawsuits over fees and investment options. This may prompt some employers to move from an SEP-IRA or SSRP to a 401(k) plan.
In addition, limits on plan contributions can be frustrating to plan participants, especially those approaching retirement age who want to make catch-up contributions, which may not be allowed in limited plans. If employers opt to change plans, recordkeepers have an opportunity to demonstrate their value, especially in the audits and paperwork required by the Department of Labor. If these requirements make small business employers nervous, a PEP might be an ideal solution that eliminates fiduciary concerns and could provide lower investment fees and access to more asset classes with higher asset thresholds, said Cerulli.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.