Editor’s note: The Center for Due Diligence 2014 conference includes a session on how advisors can build their business by serving small-plan sponsors at 11:45 a.m. Wednesday.Click here for the full conference schedule.
Can retirement advisors make money in the small-plan market rather than, say, chasing Fortune 500 targets all day? And if they did, wouldn’t that potentially help address the country’s retirement crisis?
Matthew Bryan offers a resounding yes to both.
That shouldn’t surprise anyone who knows him. After all, Bryan is the director of retirement marketing for New York-based Guardian Retirement Solutions, which is in the business of making it easier for small businesses to sponsor a 401(k) plan.
The most successful advisors tend to focus on large employers, so persuading them to prospect small plans with small margins isn’t always easy. Yet there’s little doubt of a market waiting to be served.
“Targeting the small plan market may seem like traveling in the wrong direction for financial professionals who have invested the time and resources to specialize in serving larger, more sophisticated plan sponsors,” Guardian wrote in a guide on the topic. “The fact remains, however, that a majority of retirement plans are sponsored by small businesses.”
Indeed, 90 percent of all plans hold less than $10 million in assets. Moreover, there are plenty of small businesses without any plan whatsoever.
A 2012 study by the Government Accountability Office found only 14 percent of businesses employing 100 or fewer workers sponsored some type of savings retirement plan. Guardian’s own survey found 46 percent of employers with between 25 and 249 employees had no retirement plan.
As any advisor might guess, there are myriad reasons for such dismal statistics, starting with cost and complexity.
The good news, says Bryan, is that despite those concerns, small businesses that offer plans tend to be happy with what they get.
Guardian commissioned a survey of what is and isn’t working in the small-plan market and found widespread satisfaction, particularly among sponsors that work with a “financial professional” — an insurance agent, accountant or an RIA.
In spite of the overall high levels of satisfaction, the study also revealed a troubling trend.
One-third of sponsors did not realize they were fiduciaries to their plans. Also, about 20 percent of the plans didn’t have an investment policy in place.
“There’s definitely an education gap with sponsors and enrollees. While that’s not a good thing, it does mean there are opportunities for advisors to come in and add immediate value,” said Bryan.
As things now stand, “financial professionals” of all sorts work with small-plan sponsors, though insurance agents and accountants make up the majority. RIAs are a much smaller piece of the equation.
Guardian believes that, of the nation’s 300,000 or so financial professionals, just 5 percent serve five or more retirement plans. An even small fraction of these financial pros — 5,000 perhaps — service more than 10 plans.
It’s that smaller group that has developed the greatest expertise regarding fiduciary consulting, plan design and all of the other nuances of the 401(k) world that can overwhelm small-plan sponsors — or potential sponsors.
That expertise, Guardian says, is sorely needed by small employers.
“There aren’t enough RIAs working exclusively in the 401(k) world and in the smaller-plan market of that world to meet the demand,” Bryan said. “As an industry, we have to empower advisors to meet the demand.”
Whether they want to be empowered is another matter, of course.
Advisors considering the small-plan market, Guardian says, should be encouraged by the latest fee disclosure rules. The new regulations, it says, are “opening the eyes” of small-business owners and participants, prompting them to question the value of the services provided by less-experienced financial professionals.
Serving smaller employers, Bryan said, also can be easier than chasing after big accounts.
“Many small businesses prefer turnkey solutions,” Guardian noted in its guide. “Finding a go-to small-plan service provider with robust ‘outsourced’ solutions … can help you achieve more scale, while allowing you to offer your expertise to plans and participants that need the most help.”
Guardian, of course, provides these services, as do plenty of its rivals. For example, MassMutual this week announced enhancements to its Aviator 401(k), a service aimed at small businesses with less than $15 million in retirement assets.
In any case, there are other reasons advisors will want to consider building a larger base of small employers as their customers, Guardian says.
Doing so, it says, can help advisors “stabilize” their revenue, shielding them from the impact of a large plan defection.
Also, sales cycles are more streamlined for small plans, so growth can happen more easily.
The bottom line is that about a quarter of the employers without a plan told Guardian they are interested in launching a 401(k) in the next three years.
Advisors who pursue that business obviously stand to profit – and perhaps ease the retirement crisis along the way.