Just as the convergence of wealth and retirement at the workplace is stressing the defined contribution industry, forcing massive technological and strategic changes, so is the explosion of new plans, driven primarily by government mandates.
There are not enough retirement plan advisors to handle the expected surge, from 830,000 plans in 2025 to over 1 million by 2030, as most are not interested in smaller plans. Similarly, even record keepers serving this market struggle to make money in the first three years, when many of these small businesses either go out of business or get sold.
The economic realities of declining plan fees for advisors and providers have forced most to search for new revenue through wealth services like IRA rollovers, managed accounts and outside assets, which Empower estimates are three times what a participant holds in their DC account. The DC plans are the delivery service that brings the valuable package.
Similarly, the economics of selling and servicing a 401(k) plan to a small business owner are not compelling. Fees are relatively low, liability is high, and the work can be overwhelming for plan sponsors, advisors and providers. The package is the opportunity to engage with that small business owner whose main concern is not the value of a 401(k) plan to them or their employees.
Sure, more workers are expecting their employers to offer a retirement plan, so recruiting and retention are important. But more important is revenue and cash flow, finding new clients and growing profitably while saving money on taxes, and saving more for retirement than the 401(k) limits.
The growth engine of new plans has been the two major payroll companies that offer 401(k) plans. ADP and Paychex have over 250,000 plans between them, adding 40,000-plus annually (while losing quite a few as well), highlighting the importance of payroll integration and massive sales forces calling on existing clients. Fintechs like Vestwell, Human Interest, Guideline (purchased last year by Gusto), 401Go and Betterment, many of whom partner with payroll providers, have another 150,000 plans.
But just offering an easy, low-cost solution is not going to get small business owners excited. History does not repeat itself, but, as Mark Twain once quipped, it rhymes. TPAs, which were the growth engine of new plans in the 2000s, had focused on plan design to save business owners money on taxes while putting away more retirement savings for owners and senior managers who often neglect their own retirement planning, with most of their assets in the value of the business.
It is going to take the collective effort of:
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The 10,000 RPAs who might leverage PEPs or get referrals from benefit brokers within their organization
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60,000 wealth advisors who have some DC business and will focus mostly on current clients, plus the other 200,000 blind squirrels
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Payroll providers, which have not been able to sell beyond their client base
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Fintechs mostly relying on third-party distribution
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Benefit brokers (maybe)
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IMOs or insurance marketing organizations
There are 1 million agents or advisors affiliated with an IMO who are like the independent broker/dealers to insurance agents while BDs like Northwest Mutual and MassMutual are like the wirehouses with W-2 reps. Perhaps just 500,000 IMO advisors are very active with the big three, Simplicity, Amerilife and Integrated Marketing, dominating by buying up smaller firms. But that’s more than the almost 300,000 active financial advisors, most of whom have no interest in DC plans.
Chris Miller, now a partner at Simplicity who sold his firm, Allegis, with 1,300 reps, noted that only a few of his advisors are currently interested in DC plans or working with small businesses, which has not changed over the past couple of years. Though his group is trying to help his reps understand the small business market and DC plans, he stated, “They don’t feel confident and do not want to make a fool of themselves, nor do they have a team.” He admitted they need training.
Simplicity started a pilot with Bidmoni two years ago to help their advisors, which, according to Miller, has done well, and they are now considering expanding it. While Bidmoni is at its core an RFI tool, according to their CEO and founder, Stephen Daigle, the focus is on plan design, especially tax efficiency. They also help with prospecting, which, according to Miller, “Allows our reps to see every plan in an area with some information about the business, creating solutions.”
Bidmoni loads pricing and other information into their system from 15 of the top record keepers in the up to $10 million market, creating quotes and plan design in seconds while also automating the onboarding process. Though they have partnered with one major broker/dealer, a large micro market record keeper to enable their TPA partners to find advisors in their area and a small TAMP, Daigle admitted there is still skepticism among distributors. “The retirement desks at BDs need to show that their advisors can get additional revenue from small business owners beyond the retirement plans,” he said.
“We provide solutions for the small business owner like Kai-Zen which is a leveraged life insurance product,” said Miller. The product enables the business owner to borrow from a third party to boost their contributions into an indexed life insurance product, which grows with the S&P 500 withdrawn in retirement. Other services include business valuation, succession planning and, according to Daigle, cash balance plans. Miller noted, “It is a blue ocean strategy, which is why, in part, we are considering expanding the Bidmoni pilot.”
New plan formation is exploding, and regardless of who or how it is serviced, the hidden value is selling high-value and more profitable financial products to the business owners. It truly is a blue ocean.
