With Small Business Saturday just behind us, we wanted to consider the distinctive challenges that this growing segment of workers faces and the unique opportunity that these challenges present for financial advisors.
Fifty-nine million American workers, 47.5% of the U.S. workforce, are employed in small business. This includes a growing number of professionals in the emerging “gig” economy, where temporary positions are common. These small market workers struggle to receive the same salaries, employer-based benefit plans, and insurance as employees at larger companies.
Public Policy Responds
The government is responding to this workplace challenge with new retirement plan solutions at both the state and federal level.
- State-facilitated retirement programs—recently initiated in California, Oregon, Illinois, Connecticut, Maryland, and the City of Seattle—are on track to reduce the nation’s plan coverage deficit by 17%.
- Congress is considering proposals to loosen membership restrictions for multiple-employer plans (MEPs), which would enable more small businesses to jointly sponsor a retirement plan. MEPs could lessen both costs and the administrative burden for small business owners looking to offer a plan.
Service Providers Offer Additional Solutions for Small Employers
Advisors, plan recordkeepers, and third-party administrators are also using their professional expertise and evolving technologies to close the retirement plan coverage gap. Their services are making it easier for small businesses to sponsor plans and improve employee savings outcomes.
Collaborating with Third-Party Administrators
To address business owners’ concerns about the time and resources required to administer a plan, advisors can partner with a local TPA. TPAs can consult on specialized plan design, translating technical details into more easily understood benefits for both the sponsor and employees
Outsourcing Administrative Functions
More small employers are outsourcing the administrative functions surrounding fiduciary compliance with Section 3(16) of the Employee Retirement Income Security Act. This ensures that their plan operations are compliant with regulatory mandates.
Choosing Cash Balance Plans
Cash balance plans combine the portability, flexibility, and simplicity of 401(k) plans with the high contribution limits of traditional defined benefit plans. Today’s cash balance plans have more than $1 trillion in assets, an increase of 61% since 2010.
Comparing Pricing Models
Small businesses are collaborating with advisors to determine the best retirement plan pricing structure for their company’s needs: asset-based or flat-dollar, per participant tiers. To demonstrate the impact of these different structures on a plan’s market value, advisors can use our plan comparison tool. It allows them to run a custom illustration for their clients’ plans.
The Essential Role of Purpose-Built Firms
Small employers and their advisors need recordkeepers that build modern best practices into their service model while offering expertise, technology, versatility, and independence. These purpose-built firms create greater efficiency for advisors and provide necessary support as financial services for the changing workplace continue to evolve.