Ascensus has published an in-depth white paper exploring recent innovations in both the public and private sectors that are addressing coverage and quality deficits in retirement plans for small business employees.
In the paper, researchers discuss the scale and impact of these enhancements on the retirement industry, on financial advisers’ practices, and on the financial lives of millions of Americans. Among the conclusions drawn by Ascensus researchers is that advisers cannot overlook the way the retirement planning landscape is shifting for small employers—as certain changes on the horizon will very likely impact the entire advisory industry, including advisers who focus solely on larger employers.
According to the white paper, small businesses employ about 47.5% of the U.S. workforce in 2018. The paper notes that the ranks of small business employment are increasingly accounted for by “professionals, tech-centric entrepreneurs, and business owners over age 50.”
David Musto, president of Ascensus, highlights the “twin deficits” that employees of small businesses have traditionally faced in terms of retirement benefits—deficits of both quality and coverage.
“Many small businesses have no workplace retirement benefit coverage at all—and those that sponsor plans struggle with cost and complexity,” he says.
The report cites data from Morningstar showing large businesses (those with 1,000 or more participants) can offer retirement plans for as little as 0.4% per year in plan expenses. In small plans, Ascensus says, relatively higher charges reflect that with some investment managers and plan providers, recordkeeping costs are still being paid through investment-based fees.
“This provides yet another example of small businesses’ scale disadvantage,” Musto says.
The white paper points to “a confluence of public policy solutions, industry best practices, and new technologies” that are being brought to bear to address the workplace savings challenge. (Ascensus labels itself as a disruptor in this marketplace.)
On the public sector front, new state-facilitated retirement programs have been or will be initiated in California, Connecticut, Illinois, Maryland, Oregon, and the city of Seattle. At the same time, the paper says, Congress is considering long-discussed proposals for open multiple-employer plans that would allow small employers to jointly sponsor retirement savings plans. It is Ascensus’ interpretation that these approaches will benefit Americans and will bring more individuals into the financial system in a way that broadly benefits both consumers and providers. Of course, it will be important for all stakeholders to ensure any publicly backed retirement planning options are implemented with a high degree of quality and transparency.
For their part, according to Ascensus, private-sector providers such as plan recordkeepers, advisers, and third-party administrators (TPAs) are also doing a lot to “drive the evolution of solutions that make it easier for small businesses to sponsor plans and to improve outcomes for employees.”
Zooming in on advisers’ role
According to the white paper, advisers are playing a critical role in assessing, navigating, and guiding small business plan sponsors through the increasingly complex range of choices they face in offering retirement benefits.
“Industry surveys make clear that small employers would like to offer plans but are concerned over lack of resources and inexperience with plan management,” the paper says. “According to a 2016 survey of 1,600 employers by the Pew Charitable Trusts, small businesses struggle with cost, complexity, and lack of in-house benefits departments that could help them navigate the tax code and the marketplace for plan recordkeepers, technology providers, and even advisers.”
These are all areas that defined contribution (DC) plan expert can help address. And when is the right time to encourage a small business owner to start a retirement plan? According to the Pew study, small employers are induced to create workplace savings plans when they experience increased business profits, enhanced tax credits, increased employee demand and executive tax challenges. This implies the current environment is a great time for advisers to reconsider the small business marketplace.
“Many small business owners don’t have the background or expertise to understand the intricacies of retirement plan types and offerings,” the paper says. “Advisers are a crucial lynchpin in helping them evaluate their alternatives. By consulting with their clients, advisers can help identify the retirement plan types, service models, and cost structures most appropriate for their needs. These can range from IRA [individual retirement account] and individual plans, to SEP and SIMPLE plans, and 401(k) solutions. Advisers can also help successful firms develop combined 401(k) and cash balance plans to accelerate retirement saving.”
To address business owners’ concerns about the time and resources required to administer a plan, Ascensus says advisers can partner with a local third-party administrator—or a national firm like itself. As Ascensus points out, TPAs can consult on specialized plan design, translating technical details into more easily understood benefits for both the sponsor and employees.
“By incorporating the TPA into this important phase of plan establishment, the adviser can help build the sponsor’s confidence and trust throughout the sales process,” the white paper says. “In fact, close ratios for retirement plan business tend to be higher for advisers partnering with a TPA. Data from a major recordkeeping partner for the Ascensus TPA Solutions division suggests that TPAs can also assist with client retention in the long term. Plans working with an experienced TPA stayed on this recordkeeper’s platform for an average of eight years, versus five years for those not working with a TPA.”
Musto’s personal take
Back in September, Musto presented an early cut of much of this data to the 2018 PLANADVISER National Conference, held each year in Orlando. In addition to sharing the data, he framed some of the key challenges facing Americans as they pursue retirement security by telling the stories of his uncle and father.
Musto’s uncle Anthony lived what many would think of as the American dream, at least in part. He went from humble and modest means to growing and transforming several small businesses. Starting his career as a truck driver for Kraft, he eventually moved into a food brokerage business, afterward creating his own import and marketing businesses.
“Anthony’s story shows the drive of the small business person,” Musto suggested. “But his later life shows the other side of the picture. He worked for himself his whole life, and as a result he lacked a benefits department and a focus on long-term planning. When he had health issues later in life, it was not an enjoyable retirement experience, to say the least. Especially in the last few years of his life. He died with relatively little even after such a dynamic and successful career.”
Musto compared this story with his father—Anthony’s brother—who worked for Bell Labs for 36 years, with both defined contribution (DC) plan and defined benefit (DB) plan savings opportunities. Today, Musto’s father and mother are living a happy and secure retirement.
“It shows the corporate retirement plan system is powerful, representing one of the chief ways for Americans to create lasting lifetime wealth,” Musto said.
The report, “In Focus: The Small Business Opportunity,” is available for download on the Ascensus website.