Despite the
legislation's encouragement of pooled employer retirement plans, working with
the small businesses likely to be most interested could be challenging
February 6, 2020 BY BLAINE F. AIKIN
The
SECURE Act signed into law on Dec. 20 is being hailed as the most significant
retirement legislation enacted in the past decade. It provides incentives to
get more small businesses to offer retirement plans for their employees and to
boost retirement savings generally.
For the
act to meet expectations, more small businesses need to be inspired to offer
retirement plans. Recognizing this, lawmakers created a new form of multiple
employer plan, known as a “pooled” MEP or PEP. A PEP allows
unrelated small employers to engage a “pooled plan provider” to serve as the
ERISA 3(16) administrator and the named fiduciary for their shared plan. PEPs are
designed to help participating employers reduce costs, administrative duties
and fiduciary liability (though employers retain fiduciary responsibility for
their selection and monitoring of the pooled plan provider).
Financial
service companies will serve as pooled plan providers and will undoubtedly
market their PEPs directly to business owners. But owners are unlikely to act
without the active involvement of a financial adviser in the decision-making
process.
Retirement
advisers should take a deep dive into the data about small businesses (defined
as independent business having fewer than 500 employees) to understand the PEP
market before deciding whether and how to serve it. According to the U.S. Small Business
Administration:
•
There are 5.9 million small businesses that have paid employees,
accounting for 99.7% of all firms with paid employees.
•
Small businesses account for 47.3% of all private sector
employees and, from 2000 to 2018, small businesses accounted for 64.9% of net
new jobs created in the U.S.
•
98.5% of all high-tech employers are small.
•
23.3% of small employers are home-based; 65.3% of professional,
scientific, and technical services and 70.0% of information-sector small
businesses are home-based.
At a
high level, the size of the small business market looks enticing for financial
professionals. But there are more numbers for advisers to consider in the
process of developing a strategy to provide retirement advice in this market.
Here are some important statistics from a recent Small Business Association
blog post:
•
Percentage of businesses that already have retirement plans:
•
45% of firms with 1 to 49 employees.
•
76% of firms with 50 to 99 employees.
•
90% of firms with over 100 employees.
•
89% of all employers have fewer than 20 workers.
•
35% of employees consider retirement benefits a key reason to
take a job.
•
47% say retirement benefits are an important reason to stay with
the employer.
These
statistics tell us that the market for retirement advice is biggest among very
small employers and that having a quality retirement plan helps to attract and
retain talent. These are the right conditions for PEPs; however, as the IRS web site that provides resources for small businesses points
out, there are at least eight other retirement plan options for these small
businesses to consider. Consequently, advisers seeking to provide retirement
plan advice to small business owners will need to get up to speed on the
features and benefits of PEPs relative to other available options.
The
question is, can a retirement plan specialist have a viable business
concentrating on this market? While the answer is uncertain, focusing
exclusively on retirement advice in the micro-market would be challenging
because retirement plans compete with other priorities for the scarce resources
of small businesses. Cash flow issues are the No. 1 cause of small business
failures.
A
better approach may be to provide holistic advice and help with prioritization
of financial objectives. Business owners must balance saving and investing with
managing liquidity, credit, insurance and tax issues. Bluntly, what a small
business owner typically needs is a financial planner who understands small
businesses and can deliver solutions in concert with product and service
specialists operating as a team or arranged through referrals.
Cerulli
Associates and other researchers have recently uncovered general trends of
increasing client preferences for holistic advice that is fee-based rather than
tied to products or transactions. In the world of entrepreneurs, many of whom are
home-based, these trends can be particularly powerful.
Advisers
in this space may also need to offer a flexible service delivery model that
adapts to nontraditional career paths. The planner can help orchestrate
technology-driven solutions for managing cash and savings programs, and provide
adviser-assisted or adviser-directed services as more complex needs arise.
By
providing holistic advice, a financial planner would be well positioned to work
with employees as well as business owners. By concentrating on businesses in
high tech and other professional fields, serving the micro-market would be more
economically viable.
It’s
also worth noting that the demographics of entrepreneurship have shown dramatic
shifts over the past two decades. Minorities, women, and immigrants play a
large and expanding role in the economy as small business owners (see the Kauffman
Indicators of Entrepreneurship).
While
women and minorities have historically been dramatically underrepresented in
financial services, this may slowly be starting to change. The Certified Financial
Planner Board of Standards Inc. recently announced that the
number of CFP professionals increased by 3.9% in 2019. The number of new female
certificants rose 4% and the number of black and Latinx CFP professionals grew
by about 12%.
It may
be that the demographic composition and skill sets of the next generation of
financial advisers will be better positioned to serve the small business
market.
Blaine
F. Aikin is executive chairman of Fi360
Inc. and Cefex.
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