The Aspen Institute reported in 2019 that nearly 60% of working-age Americans do not have retirement accounts. It predicted that that figure was likely to climb as the number of gig workers and freelancers rises.
According to research by Guideline, 90% of the 5.8 million small businesses in the United States do not offer employees a retirement plan. So, of the 42 million people who work at a small business, 75% of them don’t have access to a plan.
Small businesses that do offer retirement plans to their employees might find them to be costly for themselves and plan participants. According to the latest edition of the “401k Averages Book,” the average total plan cost for a small retirement plan (i.e., one with 100 participants and $5 million in assets) is 1.2%, compared with an average total plan cost for a large retirement plan (i.e., 1,000 participants/$50 million assets) of 0.9%. In addition, small businesses often lack, or don’t have access to, the expertise in Employee Retirement Income Security Act (ERISA) rules and investment management that larger plan sponsors might have.
A new generation of providers—nontraditional recordkeepers—are using technology to make offering a 401(k) cheaper for businesses and to bring employers more flexibility.
“The two big cost drivers have traditionally been client servicing and technology,” says Tim Rouse, executive director of the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute, a trade association for the retirement plan industry. “But a lot of newer firms have come in with cloud-based platforms and simple recordkeeping platforms on a self-service model to keep costs down.”
He adds, “What we hear from smaller employers is that they want it to be simple and easy [to provide a plan]. They have less resources to dedicate to benefits programs.”
Marcia Wagner, founder of the Wagner Law Group, an ERISA and employee benefits firm, stresses the importance of getting plan administration right.
“Nontraditional recordkeepers that will survive have to do two things,” she says. “The recordkeeping platform has to be robust; it’s administrating people’s pension money. You can’t make mistakes on reporting or disclosure, for example; you have to get the Form 5500 filing correct. In the ERISA realm, value has to be as close to perfect as possible.”
She notes that hiring and monitoring a recordkeeper is a matter of due diligence for the plan sponsor. “That is a fiduciary responsibility,” she says. “Anyone that can do this right and do it at low cost is going to be a disrupter.”
Lawmakers tried to address the coverage gap, costs and administrative burdens with the provision in the Setting Every Community Up for Retirement Enhancement (SECURE) Act that created pooled employer plans (PEPs), a version of multiple employer plans (MEPs) that doesn’t require a common nexus for employers to join.
Small employers looking to offer employees a 401(k) plan might consider PEPs, but Rich Rausser, senior vice president, client services, at Pentegra, recently told PLANSPONSOR that even current plan sponsors need to evaluate the pros and cons of any service provider or arrangement, including ones they are currently using. “They have an obligation to do what’s in the best interest of plan participants and to come up with solutions that are good business solutions as well,” he said.
“Even if a plan sponsor thinks its plan is running fine, a PEP at least deserves an evaluation,” Rausser noted. “A PEP can be a great solution for a lot of existing plans.”
Another development that is affecting the small end of the market is the action by states and cities to set up their own retirement plans for private businesses. Nearly a dozen U.S. states (California, Illinois, Oregon, Washington, New York, Vermont, Connecticut, New Jersey, Massachusetts and Maryland) and two cities (Seattle and New York City) have enacted legislation or set up the retirement programs, and more are considering or taking steps to do so. Although the programs differ from place to place, in general, they create mandatory automatic enrollment, payroll-deduction individual retirement accounts (IRAs) for small employers that do not offer a retirement plan to employees.
Wagner says the advent of the state-run plans could reduce the disruptive effect of the new 401(k) providers.
“Some small business owners might, for example, find it a preferable alternative for their employees to participate in state-run IRAs,” she says. “And to provide context, there is a bipartisan consensus that more individuals should be participating in retirement plans, not necessarily 401(k) plans, which are viewed in certain circles as tax-shelters. So as the number of retirement plans in the system is substantially increased, the disruptive effect of fintech service providers might be reduced.”
However, Chad Parks, the founder and CEO of Ubiquity Retirement + Savings, one of the nontraditional recordkeepers on the scene, contends that the new providers have an advantage on the low-cost challenge. For example, Ubiquity charges a flat fee for service but no asset-based fee. By contrast, he says many state-run retirement savings programs charge nothing to the employer but charge up to 100 basis points (bps) a year to the employee.
“Over 30 years, an employee would pay 10 times less in fees with a flat fee because as a person saves and his account grows, he’ll pay more with an asset-based fee,” he says.
As more states and cities roll out auto-IRA programs, as the PEP marketplace develops and as more is known about the value proposition of nontraditional recordkeepers, small companies will have to weigh the pros and cons themselves.
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