In my experience, advisers who sell start-up 401(k) plans close 3% to 6% of the time. Sometimes, the employer chooses a competitor. More often, the employer does nothing because a 401(k) plan is not a good fit for the business. Perhaps the business is too small, or the plan is too expensive.
Instead of presenting retirement plan solutions that may be a better fit, advisers often move on to the next prospect. It’s understandable. Typically, cost-effective plans that appeal to smaller businesses don’t have a lot of appeal for advisers because there’s not a whole lot of money to be made by offering them.
This approach likely contributes to a lack of awareness among small businesses. According to the 2018 Millennium Trust Small Business Retirement Survey, only 28% of businesses that do not currently offer a retirement benefit said they “have a solid understanding” of non-401(k) retirement programs like SIMPLE, SEP, and payroll deducted individual retirement accounts (IRAs).
Perhaps advisers should be thinking about these sales differently.
Investing in the Future
Not every athlete signed by a sports agent becomes an all-star. Agents identify recruit, sign, and nurture talented individuals who have the potential for greatness. Some athletes never reach their potential and the agent earns less than expected. Some athletes become household names and deliver exceptional returns on investment.
The same is true with companies. Companies have the potential to grow. Not all of them will. Some will never be good candidates for 401(k) plans, but others eventually will need different retirement and benefits plans to meet the needs of their employees as they grow. In the meantime, you have built good will and strong relationships.
There are roughly eight million small businesses with employees in the United States. The Investment Company Institute reports that there are 555,000 401(k) plans in the U.S. as of June 2019. That leaves a lot of opportunity for both advisers and the retirement industry overall.
That opportunity may be realized by proactively offering 401(k) alternatives to these small businesses. Establishing business relationships with companies that may be interested in a SIMPLE, SEP or payroll deducted IRA may create openings down the road for 401(k) plans, financial planning, risk management, business planning, and other services.
Advisers who build pipelines of companies with the potential to sponsor 401(k) plans in the future have opportunities to build strong relationships with business owners, as well as leaders who either founded their own companies, or will become executives at companies that need retirement plans. They could also become valuable referral sources, as small business owners are often part of close, tightly knit networks that share information about trustworthy vendors who have helped their business.
It is critical for advisers who put interim plans in place to communicate the breadth of their expertise, so they are well positioned when businesses reach critical mass and are ready for different types of retirement or benefit plans.
Think Beyond the 401(k)
If you have doubts about whether a 401(k) plan will be right for a company, be ready to offer retirement plan options that may better match the company’s needs and resources. Some options to consider include the following:
- A SIMPLE IRA can be a great fit for businesses that have 100 or fewer employees. Plan participants make pre-tax contributions and any earnings grow tax deferred. Employer contributions are mandatory but flexible and tax deductible as business expenses. While some employee notifications are required, there is no plan tax filing with the IRS, so SIMPLE plans are less administratively demanding than 401(k) plans. Employees may contribute up to $13,000 in 2019, and catch-up contributions may be allowed. An employer that establishes a SIMPLE IRA is an ideal prospect for a future 401(k) plan. These are likely up-and-coming businesses with more than a handful of employees and enough profitability and altruism to contribute on behalf of their employees.
- Simplified Employee Pension (SEP) IRAs typically are a good fit for sole proprietors or small family businesses. Employers make tax-deductible contributions to traditional IRAs that are owned and controlled by employees and must contribute the same percentage of income for all employees. A SEP plan requires a formal written agreement and some employee notifications but is far less administratively complex than a 401(k) plan. Employers may contribute up to 25% of compensation, or $56,000, to employees’ IRAs in 2019. An employer that establishes a SEP IRA may be an excellent wealth management prospect. Though unlikely to grow into a full-fledged 401(k) plan sponsor, they have the potential for other lucrative offerings like personal wealth management, estate planning, or family trusts.
- Any business can help employees save for retirement by deducting money from their paychecks and sending it to traditional or Roth IRAs the employees have established. The employee makes all contributions. The employer is responsible for sending the funds to the accounts, and there are no filing requirements. Such payroll deducted IRAs can be a fit for a variety of companies. Taking a chance on prospects whose mission and values align with yours could lead to a variety of opportunities.
About 55 million American workers do not have the opportunity to save for retirement in a workplace plan. By providing access to the best possible solution for a business, the adviser introduces value to not just that one business, but to the whole community in which he or she practices.
In addition to creating good will and reducing the strain of retirement insecurity on community resources, helping companies implement affordable retirement plans has a myriad of benefits. These include building strong relationships with clients and centers of influence; improving business owners’ ability to save for the future; ensuring employers attract and retain the talent they need; and increasing employees’ retirement security.
If you haven’t already, introduce prospective clients to IRA retirement plan options. You just might thank yourself in the future.
*Note from the editor:
Kevin Boyles is a vice president and business development director at Millennium Trust Company LLC. He has nearly 20 years of experience in the retirement plan and health savings marketplace. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
This feature article is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of PLANADVISER Magazine or Institutional Shareholder Services.