PANC 2018: Transformation in the Small Business Market

Significant transformation is happening in the small business retirement plan market; what does this mean for the fiduciary adviser community?

Presenting to the 2018 PLANADVISER National Conference in Orlando, David Musto, president of Ascensus, 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,” Muston 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.

According to Musto, small businesses cover roughly 48% of the U.S. work force, and they account for something like 63% of new job creation. At the same time, 81% of small businesses have no employees outside the owner’s immediate family, while 29% are minority owned, and 45% are owned at least partially by women.

“Many of these owners resemble my uncle Anthony,” Musto said. “More than half, 51%, are 50 years or older.”

Musto noted that many of the same challenges facing the small business community when it comes to retirement planning also face workers in the “gig economy,” which represents nearly 21 million people in the U.S.

“Like employees of small businesses, unfortunately, gig workers make significantly less on an annual basis and have very little access to workplace planning,” Musto warned. “And take note, gig workers are not just young people. Thirty-seven percent of the gig economy are workers who are 55 or older, and increasingly, this group also includes higher skill works, such as lawyers and engineers.”

Musto appealed to PANC attendees to take up the task of helping these under-served groups. There may be some surprisingly big opportunities out there, he added, pointing to the examples of Lyft and Urber starting to offer payroll deductions for individual retirement accounts. 

“They’re even offering financial planning,” Musto said.

Musto noted how the advantages that large employers have in the DC space—the professionalization of management and the economies of scale—can be replicated for small businesses in a variety of ways. The most obvious pathway is open multiple employer plans (MEPs) and the government administered IRA or marketplace approaches being created already in various states.

“Clearly, small companies have the best interest in mind for their workers’ retirement, but they face serious obstacles,” Musto said. “Chiefly, these are cost, lack of staff, fiduciary concerns, and volatility of earnings.”

Musto concluded by voicing optimism about the increased collaboration between third-party administrators (TPAs), recordkeepers and fiduciary advisers.

“We see significant growth in use of TPAs and fiduciary advisory services going together,” Musto said. “By quarterbacking providers as a discretionary fiduciary, this is one way the adviser can support small clients as they track and manage their myriad responsibilities. There is tremendous potential here for efficiency, even as small business owners are very cautious about fiduciary responsibilities. Working with a TPA, the adviser as at 3(21) or 3(38), can efficiently deliver a complete fiduciary solution.”