There is a burgeoning need among small businesses for retirement planning assistance. And it is in this market that financial services professionals can have a big impact. Yet, many advisors remain reluctant to enter the small business retirement plan market.
This reluctance is too often grounded more in misconception than reality. In fact, there are more opportunities within this segment than many advisors realize. It is time to shed light on five common myths about the small business market.
Myth 1: The small business market is not worth my while.
Actually, the small businesses retirement plan market is growing rapidly and is quite lucrative. Consider this: Retirement plans for businesses with fewer than 1,000 employees represent a multibillion dollar market.
The number of potential investors is also significant. Small businesses account for more than 50% of the private work force in the U.S. And only about half of those employed by small businesses have access to an employer-sponsored retirement plan. Moreover, most signs point toward long-term growth in the small business marketplace.
Most retirement plans now coming on line originate from small businesses. The small business 401(k) market is projected to grow faster than the overall 401(k) market through 2010. Just last year, less than one-third of firms with fewer than 25 workers offered a 401(k) program to their employees. Because small plans currently enjoy only a small share of the trillion dollar 401(k) market, whoever can reach this market early stands to benefit.
Also, branching out into retirement plans can help advisors increase their “return on investment” with existing small business clients. Many advisors have already sold clients business insurance, group policies, life insurance or other benefits. By building on this existing business with a retirement plan, advisors can expand the number of financial services they offer, create more value and strengthen the client relationship.
Myth 2: Serving small businesses is too complicated.
Another common misconception among advisors is that making the transition to retirement plans for small business is too complicated. The reality is these plans are easier to provide and more accessible than ever before.
Providers are increasingly reducing fees and removing hurdles to make it simple for companies to offer plans. Providers now supply an array of services to assist advisors working with small businesses. These often include help with plan design, sales guidance, regular meetings with interested plan sponsors, as well as employee enrollment and participation training.
These services are particularly helpful for reaching a small business client who typically does not have a dedicated finance or human resources staff to manage the company’s retirement plan.
Myth 3: Retirement plans are cost-prohibitive for small business clients.
Many small business owners mistakenly believe that making a retirement plan available to employees is almost always too expensive. Yet, offering employees a retirement plan may be more cost-effective than many businesses think.
We can now put together a robust retirement plan that costs the client hundreds, not thousands, of dollars. In some cases, providers are also embracing plans with no or very low investment minimums.
Not only are plans becoming less expensive, they also allow the client some important tax advantages. Additionally, the government is doing more to encourage small businesses to offer retirement plans. For example, employers may be entitled to a tax deduction for their contributions to employees’ 401(k) accounts. In addition, a small business client may be able to receive a start-up tax credit for the first three years after beginning a plan.
In a competitive labor market, can small businesses really afford not to have a retirement plan? Access to retirement savings is an important part of hanging on to talented employees. Given that so many small businesses rely on a few, highly-productive employees, finding ways to keep them on board is crucial to a company’s success.
Myth 4: Small business equals limited investment options.
Traditionally, small businesses have not enjoyed the same access to investment options as larger companies. In the old days, those smaller enterprises that could find a 401(k) could usually participate in only a handful of mutual funds offered exclusively by the carrier.
In our case, we do not limit investment options to proprietary mutual funds. Our entire plan design revolves around bringing Fortune 500-style plan benefits to smaller companies.
For example, our 401(k) option gives small businesses access to diverse mutual funds from leading investment management firms with over 40 investment options. In addition, a broad base of mutual fund options is a feature that advisors value. According to one recent survey, financial advisors rated having access to multiple fund families as being the most important platform feature.
Myth 5: All small business plans look the same.
There is huge demand for retirement plans among a diverse group of small enterprises, including dentist offices, accounting agencies, technology startups, and local law firms, among others. By partnering with the right provider, advisors can customize an array of innovative plan features to fit each client’s needs. Advisors have the flexibility to develop defined contribution plans, like a conventional 401(k), a defined benefit plan or some combination of the two.
While defined benefit plans may be on the wane at mega-companies, they are an increasingly popular option among certain small business clients. Often this is because the business owner can set more aside for retirement in a defined benefit plan than with a traditional 401(k).
In many cases, the owner may be able to contribute well over $100,000 toward retirement in 2006 under a defined benefit plan. Thus, instituting a defined benefit plan can be a good way for an older business owner to “catch up” on retirement savings and transfer earnings in a tax-efficient way.
Defined benefit plans are designed to pay participants a set benefit during retirement. Since these plans are funded by the employer only, potential clients should generally have stable earnings and large discretionary income where tax benefits and/or retirement benefits are a priority. Many times, this means a small business owner with just a few professional staff members.
Entering the small business retirement plan market may not be as difficult as many advisors think. While providers have traditionally focused mainly on chasing larger plans, the small business plan market remains fertile ground.
Smaller firms are interested in finding a retirement solution, but are unsure where to go to find a plan provider. Advisors not only have an opportunity to make the most of this emerging opportunity, they can also help level the playing field for small business and give more people access to the retirement savings vehicles they deserve.