Client Service April 12, 2024

Small Plan Growing Pains

Advisers and recordkeepers discuss the viability of working in the small plan space amid anticipated growth.

 

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In a panel hosted by the National Association of Plan Advisors Tuesday, a group of advisers and recordkeepers met to discuss the “big opportunities” around small plan creation and the opportunity to close the coverage gap for 57 million workers.

But, as the group discussed, in the case of small plans, growth in numbers is not necessarily a slam dunk for advisory firms.

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“Something I find interesting is the use of the word ‘exciting’ and ‘small market’ in the same sentence,” joked David Montgomery, director of retirement investment services, OneDigital.

The plan adviser went on to discuss some of the challenges of servicing small plans, which can bring in lower revenue but often requires the same amount of work as a large plan in terms of guidance and servicing. Montgomery went on to say, however, that advancements in technology, regulatory changes and the way advisers operate their business are all making small plan coverage more attractive.

“There’s a variety of new pieces of the puzzle that are making it a bit more clear and viable for [advisers] to be comfortable and serve this underserved market,” he said.

Montgomery and the other panelists went on to note advancements, including pooled employer plans, regulatory changes that encourage plan creation, and financial technology advancements ranging from the use of artificial intelligence to more seamless payroll integration.

Joe Smolen, executive vice president, core and institutional markets, Empower, noted a recent Cerulli Associates report forecasting that the 401(k) market would grow from about 668,419 total plans at the end of 2022 to nearly 1 million by the end of the decade. Smolen, whose Empower recently launched a small plan 401(k) startup solution called Ready Select, said the opportunity is there, but the industry has to be ready for it to serve the market.

“Are we as an industry prepared for that growth?” Smolen asked the audience. “Whether you are a DC specialist that is in this market or you’re a wealth adviser, the opportunity is presenting itself for both practices.”

Problem Solving

In a separate interview on the sidelines of the conference, Sean Jordan, head of core and middle markets for Retirement and Income Solutions at Principal Financial Group, called the plan coverage gap a “huge problem to help solve.”

Jordan noted that many of the millions of businesses without a retirement plan don’t know about the tax incentives from SECURE 2.0 that will help fund a plan for at least three years.

“It’s a little like field of dreams—you can build it, but it doesn’t mean they will come,” he said. “It’s part of the equation.”

Jordan noted when Principal created its small plan offering, some key areas of focus were simplicity of sign-up along with speed, a priority for a small business.

“Think of the business with ten employees,” he said. “That person doesn’t have a benefits person or a payroll person—it’s them. They are the business owner and they are wearing many hats.”

The recordkeeper’s small plan offering for businesses with fewer than 100 employees, Simply Retirement, currently has about 2,300 plans and $200 million in assets under administration since it launched in 2020, though the firm has added about 8,000 startup plans in total in that time period through other business lines. 


“We’re building a lot of relationships with our distribution partners like some of the advisory firms,” he said. “There is some alignment of strategies there—they’re saying ‘how do we help some of our advisers serve the small plan market?’ …. we can tailor our offering for advisers who are trying to chase the same opportunity.”

Economic Bedrock

Mike Dullaghan, director of retirement sales execution, Franklin Templeton, speaking to plan advisers in the panel session, noted that the plan advisory business to provide American workers with a workplace plan to help them save for retirement.

“Why do most of us come to this conference and do what we do? Because we believe that every American family deserves a chance to reach financial independence,” he said. “How do they get there without a workplace plan? They don’t. So our ‘why’ is messed up for about half of American workers if they don’t have a workplace savings plan.”

Dullaghan said he sees opportunity in the small startup plan market because it’s an opportunity to finish the job of getting workers into qualified retirement plans.

“What makes me excited is, as we think about all the success that this industry represents, and you think about what’s coming over the next ten years, the statistics would say we are halfway there,” he said. “We’re halfway to covering as many American workers as possible with a workplace savings plan, and if you think you’ve changed lives so far, guess where the majority of these uncovered workers work? They are the bedrock of America’s economy.”

The problem, however, is that it doesn’t look possible to double the number of advisers to cover this space, Dullaghan said. To help solve that issue, he said, advisers need to get comfortable and even “addicted” to fintech companies and resources that can help with plan sign-up and management.

“We need fintech to help us do what needs to be done,” he said. “If you’re not addicted to at least two or three fintech companies, you better get addicted, and you better get addicted quick, because we are going to need your help.”

Practice Management April 12, 2024

High-Deductible Health Plan Opportunities and Challenges

The usefelness of high-deductable health plans depend in part on a plan sponsor's participant pool makeup, according to panelists speaking at PLANSPONSOR's 2024 HSA conference.

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Plan sponsors should consider offering a high-deductible health plan, but only after weighing the pros and cons for their workforce, according to panelists speaking Wednesday as part of an annual HSA conference held by PLANSPONSOR, which is a sister publication of PLANADVISER.

Leonard Spangher, vice president and senior health consultant at Segal, explained that an HDHP tends to be a lower cost health plan option for employers, as it allows them to pass along savings to employees in the form of lower costs for joining the health plan. 

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“It tends to allow an employee to have more control over their paycheck,” Spangher said. “They’ll have more cash on hand so they can spend it, save it [or] they can put it into an HSA.” 

Kelly Conlin, managing director and chief health actuary at Gallagher, shared that a recent Gallagher survey, which included responses from more than 4,000 employers, found that 53% of all employers in 2023 offered a HDHP. However, the data showed major gaps in the number of large employers that offer an HDHP, compared to small employers. 

According to Gallagher, 74% of companies with 5,000 or more employees offer an HDHP, whereas only 39% of companies with fewer than 100 employees offer one. Conlin said this is expected, as larger and mega companies typically have the resources to offer more health plan options.  

Larger companies also tend to see more employees contributing to health savings accounts than small companies, which current law only permits when paired with an HDHP, Conlin said.   

Diverse Financial Situations 

Spangher said it is important that employers understand their employee populations. If an employer decides to fully replace their current health plan with an HDHP, it could put participants under financial stress, as high deductible exposure could be a shock to some workers—especially those who are lower-paid. With potential high costs, Spangher said changing to offering only an HDHP can also lead to employees delaying or avoiding medical care, which could make medical costs more expensive down the line. 

“Employers really need to teach employees how to save in this environment,” Spangher said. “For example, putting money from the lower payroll contributions [for the cost of health insurance] into the HSA.” 

He added that the longer an individual waits to join an HDHP, the higher the probability is of claims occurring, which could require an individual to draw down an HSA to cover those claims if they cannot afford the high deductible. 

The positives that come from offering an HSA, Spangher explained, are triple-tax advantaged: money goes into the account on a tax-free basis, grows tax-free and can be withdrawn tax-free for health care purposes. The HSA is also 100% employee-owned and portable, as it can be taken with an employee from job to job.  

Additionally, funds in the HSA roll over each year, unlike a flexible savings account where the money must be used by the end of the year. 

Restrictions on HSAs 

There are, however, some restrictions on HSAs for employers to consider. For example, Spangher explained that employees cannot contribute to the HSA once they are enrolled in Medicare, and there is a 20% tax penalty that would be applied if a distribution is used for non-health purposes while the account owner is still working. There is no additional penalty (beyond income taxes) on withdrawals once the account owner is retired.  

HSAs are also subject to non-discrimination testing, which Spangher said is important for employers to be aware of. 

Greg Fiore, senior vice president at OneDigital, said when he is advising employers on offering an HDHP, he often sees resistance from HR staff who may feel the need to advocate internally for the needs of low-paid employees because the first year with an HDHP can be extremely burdensome, as the employees and their families are trying to meet the deductible. As a result, he said better outcomes often occur when an employer offers a PPO plan option for a sub-group of employees, as well as an HDHP for other groups of employees. 

“When you choose a high deductible health plan, it is more risk or more work for the employee to navigate the system,” Fiore said. “What we traditionally find is that the employer is backing into the HDHP and the PPO plan based on their financial contribution… They find parity there, [but] that’s not rewarding the employee to take on the added risk.” 

Supplemental Health Benefits 

Since an employee is assuming more risk by signing up for an HDHP, Conlin said there are different strategies and additional benefits that employers can offer alongside the HDHP. For example, she said offering a hospital indemnity plan, an accident plan or a critical illness plan can further protect workers against higher or extraordinary health costs. 

“What that will do is enable employees to understand that if they have a certain condition that costs a lot, like cancer, that might be covered under one of those other programs,” Conlin said. “This gets [employees] more comfortable with their out-of-pocket costs.” 

Conlin said the trend of care avoidance is more frequent today than it was during the height of the Covid-19 pandemic, and she said, medical financing is another strategy that could help workers afford out-of-pocket costs. An employer would essentially pay a fee to an external vendor to make financing available  to be repaid through payroll deductions over time, enabling an employee to pay for out-of-pocket expenses over time. Conlin added that this kind of financing also could help employees paying for things like pet expenses, dental costs and more. 

Fiore added that conversations about HSAs and other health benefits should be discussed with employees at least eight weeks before open enrollment occurs in order to ensure that people are understanding the complexities of the plans and to allow them time to decide what plan works best for them.  

Conlin said using personas, or profiles that align with the characteristics of different categories of employees, is also an effective way to communicate the benefits of HSAs because it provides examples of what worked best for different subsets of employees.  

A full recording of the webinar can be watched here on PLANSPONSOR’s website. 

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