Why Small-Business 401k Plans are Worth the Effort
Small businesses represent a significant 401(k) target market for advisors: Thirty-four percent of the American workforce is employed at a business of 100 or less, and according to the Government Accountability Office (GAO), only about 14 percent of small employers sponsor an employee retirement savings plan.
The GAO says this number isn’t higher primarily because small employers are “overwhelmed by the number of plan options, plan administration requirements and fiduciary responsibilities,” as well as a simple lack of time and resources.
But for advisors, this is a perfect storm of opportunity, says Independent Wealth Management’s president and CEO, Kurt Rossi.
Rossi notes that small-business owners face many real and perceived barriers, but advisors are responsible for showing them how simple and cost-effective 401(k) plans have become.
“Showing an owner how they can leverage their business to impact the personal financial planning for themselves and their employees is incredibly rewarding” Rossi says. “They are often stuck in the weeds of day-to-day business operation and overlook their personal planning. Advisors need to have the passion to explain the advantages of retirement plans.”
He adds that, since the Department of Labor implemented regulation in 2012 that improves transparency and exposes hidden 401(k) costs, the industry has shifted toward fee compression. This, in turn, has led to more – and better -- choices.
Rossi says that this now allows small businesses to implement “fantastic” plans.
“It’s an exciting time in the industry now that even small companies can have a 401(k) plan that’s just as good as a Fortune 500 company’s,” he adds.
Yet advisors still need to tackle the education component. Small-business owners hold misconceptions about a plan’s expense, paperwork and maintenance, says Rossi.
“What they are really underestimating is the tax benefits of setting up a 401(k) plan and how it can help them attract and retain talent,” he says. “Advisors need to walk them through the advantages and spend time on the front end to design the right plan.”
Currently, small-business owners who meet specific criteria can claim a 50 percent credit toward ordinary and necessary eligible plan startup costs (up to a maximum of $500 per year) for each of the plan’s first three years. Additionally, an employer’s matching contributions (up to applicable limits) are also tax-deductible; this also applies to any contributions the owner makes to his own plan.
Rossi says that if employers are hesitant to offer a match, it’s important for advisors to communicate the economic impact of not offering it.
Or, as Rossi puts it, “I ask owners, ‘Would you rather give money to the IRS or your employees?’”
Rossi has set up plans for numerous small businesses, and it has led to more business opportunities for his firm.
“You can’t look at these clients as a one-off,” he says. “You have to be committed to the defined contribution space. A 401(k) plan is a great way to demonstrate your value and build trust with participants and company principals. For me, this has led to owners becoming personal financial planning clients. It’s deepened relationships and allowed me to advise them on how their business integrates with their personal life.”
Most importantly, Rossi says, advisors need to advocate for the small business and add value beyond creating a menu of investment choices. This approach will also lead to referrals because “owners talk to other owners,” he says.
Even if a company has a plan in place, Rossi has found that many have “legacy” plans with high fees and that advisors should feel confident disrupting the plan by finding ways to reduce costs and improve services.
Advisors can even take this a step further: Rossi recalls a new client whose existing plan cost he was able to decrease by 25 percent. Two years later, he approached the business owner and told him that he had benchmarked his plan and found another provider that could lower costs by an additional 15 percent.
“The owner had been happy with the plan and was initially skeptical and asked me what I had to gain from the change,” says Rossi, who told him he was gaining nothing and that his advisor fees would remain the same.
He adds that advisors assume they should just leave the plan as is if the client is content. But this is not always the best option for the client. Instead, advisors need to be constantly looking for better partners and ways to improve the plan.
“Advisors can’t be afraid to shake it up.”