Just as the convergence of workplace wealth and retirement is stressing the defined contribution industry, forcing massive technological and strategic changes, there is also an explosion of new plans, largely driven by government mandates.
There are not enough retirement plan advisors to handle the expected growth from 830,000 plans in 2025 to more than 1 million by 2030, because most are not interested in smaller plans. Similarly, recordkeepers operating in this market also struggle to make money in the first three years, when many of these small businesses either go out of business or are sold.
The economic realities of declining plan fees for advisors and providers have forced most to seek new revenue through wealth services such as IRA rollovers, managed accounts and outside assets, which Empower estimates is three times as much as a participant holds in their DC account. DC Plans is a delivery service that brings valuable packages.
Similarly, the economics of selling and servicing a 401(k) plan to a small business owner are not compelling. The fees are relatively low, the obligations are high, and the work for plan sponsors, advisors and providers can be overwhelming. This package is an opportunity to connect with the small business owner whose main concern is not the value of the 401(k) plan for them or their employees.
Certainly, more employees are expecting their employers to offer retirement plans, so recruitment and retention are important. But more important is revenue and cash flow, finding new customers and growing profitably while saving money on taxes, and saving for retirement over and above the 401(k) limit.
The growth engine of the new plans has been the two major payroll companies that offer 401(k) plans. ADP and Paychex have over 250,000 plans between them, adding over 40,000 plans annually (while also losing some), highlighting the importance of payroll integration and heavy sales forces attracting existing clients. Fintechs like Westwell, Human Interest, Guideline (purchased last year by Gusto), 401go and Betterment, many of which partner with payroll providers, have another 150,000 plans.
But simply offering an easy, low-cost solution won’t get small business owners excited. History doesn’t repeat itself, but, as Mark Twain once quipped, it rhymes. TPAs, which were the growth engine of new plans in the 2000s, focused on plan design to save business owners money on taxes while setting aside more retirement savings for owners and senior managers. who often neglect their retirement planning, Most of his wealth is in the value of the business.
This will require a collective effort:
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10,000 RPAs who can take advantage of PEP or receive referrals from benefits brokers within their organization
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60,000 wealth advisors who have some DC business and will focus mostly on current clients, plus another 200,000 blind squirrels
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Payroll providers who are not able to sell beyond their customer base
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Fintechs mostly rely on third-party distribution
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IMO or Insurance Marketing Organization
There are 1 million agents or advisors associated with IMOs that are like independent broker/dealers for insurance agents, while BDs like Northwest Mutual and MassMutual are like wirehouses with W-2 reps. Perhaps only 500,000 IMO advisors are very active with the three big companies, Simplicity, AmeriLife and Integrated Marketing, building their dominance by buying up smaller companies. But that’s more than the roughly 300,000 active financial advisors, most of whom have no interest in DC plans.
Chris Miller, now a partner at Simplicity who sold his firm with 1,300 representatives to Allegis, said only a few of his advisors are currently interested in DC plans or working with small businesses, which hasn’t changed over the years. Although his group is trying to help its reps understand the small business market and DC plans, he said, “They don’t feel confident and don’t want to make a fool of themselves, nor do they have a team.” He admitted that he needed training.
Simplicity started a pilot project with Bidmoney two years ago to help their advisors, which Miller says has gone well and they are now looking to expand it. While BidMoney is an RFI tool at its core, according to their CEO and founder, Stephen Daigle, the focus is on plan design, specifically tax efficiency. They also help with prospecting, which, according to Miller, “allows our reps to look at every plan in the field with some knowledge of the business and create solutions.”
Bidmoney loads pricing and other information from 15 top record holders in markets worth up to $10 million into its system, generating quotes and plan designs in seconds as well as automating the onboarding process. Although they have partnered with a major broker/dealer, a large micro market record keeper and a small TAMP to enable their TPA partners to find advisors in their region, Daigle acknowledged that there is still skepticism among distributors. “The retirement desks at BD need to show that their advisors can drive additional revenue from small business owners beyond retirement plans,” he said.
“We offer solutions for small business owners like Kai-Zen which is a leveraged life insurance product,” Miller said. This product enables the business owner to borrow from a third party to increase their contribution to an indexed life insurance product, which increases with the S&P 500 withdrawn in retirement. Other services include business valuation, succession planning and, according to Daigle, cash balance plans. “It’s a blue ocean strategy, which is why, in part, we are considering expanding the BidMoney pilot,” Miller said.
The new plan is being created rapidly, and regardless of who or how it is served, the hidden value is to sell higher-value and more profitable financial products to business owners. It really is a blue ocean.