The Wild, Wild West
Eleven years ago,David Weaver worked with two self-employed gentlemen in their 60s who wanted to retire. Their firm, which employed 15 people, designed, sold, and installed warehouse rack systems and each earned approximately $150,000 annually from the company. The organization had no retirement plan, but the owners believed they could retire on the proceeds of the sale of the business. However, says Weaver, without the two designers/owners, the business was only worth what the assets could net, about $400,000. This was not the $4 million the owners hoped for, so the owners had to put off retirement, start saving, and make other arrangements, says Weaver, an advanced planning attorney with Edward Jones in St. Louis, Missouri.
That story is not at all unusual, says Weaver, and underscores the need for even the smallest businesses to have qualified retirement plans. The reality is that few do. According to data from Judy Diamond Associates, 65% of firms with 2 to 99 employees and annual sales volume of $500,000 to $5 million have no retirement plan. March 2009 data from the U.S. Bureau of Labor Statistics indicates that 52% of U.S. employees working for private-sector small businesses with fewer than 100 employees had no access to an employer-sponsored retirement savings plan.
This market, say experts, provides a great opportunity to boost the bottom line for those advisers willing to venture there. “There are a lot of plans out there waiting to be started,” says Jerry Kalish, President of National Benefit Services Inc., in Chicago, Illinois. Kalish estimates that there are approximately 700,000 prospects in this space. The small and micro markets, say the experts, can provide fertile ground for selling not only 401(k) plans, but also profit sharing, cash balance, and defined benefit plans as well.
This micro- to small-market segment of the retirement plan industry is immature right now, so advisers can grow with it, says Kevin Crain, Head of Institutional Client Relationships for Bank of America Merrill Lynch. “The small-business segment is the great frontier, and more and more small businesses are created every day,” he says.
Furthermore, you never know where start-up plans will land, says Bruce Gsell, Merrill Lynch Senior Financial Adviser based in Edison, New Jersey. Apple, after all, started with three guys building computers in Steve Jobs’s garage.
There are, of course, a number of challenges to selling in this market. The biggest challenge, says Kalish, is getting in front of the business owners. Small-business owners, he explained, are deluged with people wanting to get in front of them. Because they are overwhelmed with the day-to-day tasks of running their business, explains Crain, they have even less time than business leaders of larger firms. “Small-business owners have other priorities,” he says. They may know setting up a plan is a good thing to do, he says, but other things are higher on the priorities list.
Right now, the current economy is also part of the challenge, says Bill Harmon, Vice President of 401(k) for Great-West Retirement Services in Denver, Colorado, who says that, the last few years, he has seen 401(k) start-ups taper off dramatically. “Companies are just trying to make payroll and turn on the lights,” he says. “They’re not looking to add benefits.”
The key to landing prospects in this market, say experts, is dispelling misconceptions. “It’s an awareness campaign,” says Harmon. Replacing misperceptions with reality is crucial to getting the sale, he says.
Spreading the Truth
The first myth to dispel is that a retirement plan is too complicated for a small business with limited resources to offer. The fear, says Harmon, is that the business does not have the staff to handle it. Today, however, plans are easier than ever to administer, he says. Advisers should show business owners how plans can be tied to payroll functions and are not as complex to administer as even five years ago, he says. The truth, says Kalish, is that no matter where a firm is on the business cycle, from start-up to mature, there is a plan design for that organization. It does not have to be complicated, and there are service providers, both full-service recordkeepers and third-party administrators, that can administer the plan for them, he adds.
The second myth to dispel is that setting up and running a retirement plan is too expensive. Again, advisers can show business owners what options are available and what it will cost. Simply speaking to small-business owners about their options is important, says Crain. “It’s a strong consultant opportunity,” he says. The small-business owner, he says, has no clue about what to do, and no idea as to what is available and how to choose.
However, perhaps the biggest myth for advisers to dispel, says Weaver, is the fiction that the business owner can retire on the sale of the business and therefore does not need separate retirement savings. Small-business owners do not understand that they need to be saving for their retirement, separately from any income they may get from selling the business, explains Weaver.
Business owners often focus only on putting money back into the business, and not saving separately for retirement, says Weaver. There is often the “delusion,” says Weaver, that, at retirement, the business owner can sell the business and retire on the proceeds. The truth is, he says, that the potential sale price of most small businesses will not fund retirement.
Dealing with this misconception must be handled delicately to avoid offending the business owner, says Weaver. Advisers should ask small-business owners if they ever have asked a professional what their business is worth, he says, and should try to get the prospect to speak with an attorney or someone else who knows how to value the business.
Advisers, says Weaver, need to make business owners aware that they need to take their retirements into their own hands and not depend on selling the business to fund retirement. Advisers should also point out that it is a diversification issue, he says. By relying on selling the business, small-business owners are putting all their eggs in one basket. Even if the business is now worth enough to fund a comfortable retirement, he says, that could change rapidly due to economic conditions or new developments.
Also point out that the tax benefits of having a retirement plan for business owners are real, and can be significant, he adds. Retirement savings, he notes, not only are not taxed when put into the plan, whether it’s a defined contribution or defined benefit plan, but also return on investment within the plan is tax-advantaged.
What’s in It for Me?
Pointing out the benefits to the owners is often crucial because small-business owners often focus on “what’s in it for me?” says Gsell. In bringing up the business owners’ own need to save for retirement, says Gsell, point out that they will need 70% to 90% of their pre-retirement income to have a comfortable retirement and maintain their standard of living.
Another “what’s in it for me” point is the attraction and retention of key employees, says Gsell. Advisers also should educate small-business owners as to the benefits of retirement plans to attract, retain, and motivate workers, he says. “I don’t care what the economy is like, business owners have to retain key employees,” says Kalish.
Often, says Weaver, small-business owners think that, if they just pay the going rate for salary, that is enough to attract and retain workers, and do not fully understand that they lose workers because they can get the same salary plus retirement benefits elsewhere. Business owners often think that providing benefits is expensive, but they do not realize the costs associated with turnover, says Weaver. In a small business with few employees, retaining key employees is even more critical, he adds.
An adviser should benchmark the prospect against other companies of its size and in similar industries, and explain to the business owners the need to offer similar benefits to compete.
A retirement plan also can align employees’ goals with those of the company,’ says Harmon. If the company is in a growth spurt, a retirement plan is an attractive benefit that can be used to attract good employees and to align financial rewards with the company’s goals.
The small- to micro-plan market provides a new frontier of prospects for advisers willing to be adventurous, say the experts. If you can make it in the door, there are plenty of reasons why small-business owners should be putting retirement plans in place, says Kalish.