In a recent article published by Wealth Management, Rick Irace, chief operating officer of Ascensus retirement, cites several points as evidence of a “quality deficit” for small retirement plans versus their large market counterparts. As for closing this gap, Irace suggests that small business owners consider consulting with a third-party administrator (TPA). “I do think that for the sponsor that’s really concerned about administrative burdens and other things, the TPA can…step in and consult on specialized plan design. They can talk about technical details in a way that’s much easier understood for the sponsor and their employees,” adds Irace.
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.
Public Policy and Industry Solutions Taking on Retirement Plan Coverage and Quality Deficits
Dresher, PA — Ascensus—whose technology and expertise helps millions of people save for retirement, education, and healthcare—has released a white paper exploring recent innovations in both the public and private sectors that are addressing coverage and quality deficits in retirement plans for small business employees. In Focus: The Small Business Opportunity discusses the scale and impact of these enhancements on the retirement industry, financial advisors’ practices, and the financial lives of millions of Americans.
Small businesses play a critical role in the U.S. economy, employing about 47.5% of the U.S. workforce. The paper notes that the ranks of small business employment are increasingly accounted for by professionals, tech-centric entrepreneurs, and business owners over age 50. However, the small business segment has traditionally struggled to provide retirement plans for employees.
“Research suggests that small businesses are hindered by ‘twin deficits’ of both quality and coverage,” states David Musto, president at Ascensus. “Many small businesses have no workplace retirement benefit coverage at all—and those that sponsor plans struggle with cost and complexity.”
The white paper notes that a confluence of public policy solutions, industry best practices, and new technologies are being brought to bear to address the workplace savings challenge. In the public sector, new state-facilitated retirement programs have been or will be initiated in California, Connecticut, Illinois, Maryland, Oregon, and the city of Seattle. At the same time, Congress is considering long-discussed proposals for open multiple-employer plans that would allow small employers to jointly sponsor retirement savings plans.
Private Industry Solutions and Best Practice
For their part, plan recordkeepers, advisors, and third-party administrators (TPAs)–together with a steadily evolving array of technologies–
– Advisors are playing a critical role in assessing, navigating, and guiding small business plan sponsors through the increasingly complex range of choices they face in offering retirement benefits that can boost productivity and help with employee recruitment and retention.
– TPAs are collaborating with plan sponsors and their advisors to streamline regulatory disclosure and compliance and to evolve new technologies and more secure data solutions.
– Plan sponsors are increasingly outsourcing administrative functions associated with fiduciary compliance with Section 3(16) of the Employee Retirement Income Security Act (ERISA) in order to ensure that plan operations are consistent with regulatory mandates.
– To enhance savings levels for employees, small business owners are increasingly turning to Cash Balance plans, a hybrid savings mechanism that combines the flexibility and portability of 401(k) savings with the high contribution limits associated with traditional defined benefit plans. Cash Balance plans today top $1 trillion in assets under management, an increase of 61% over the past eight years.
– As the industry continues to experience consolidation among multi-purpose financial services firms, “purpose-built”
“Small business owners and employees are at the cusp of a new world with multiple opportunities to join the workplace savings mainstream,”
To download In Focus: The Small Business Opportunity, visit bit.ly/SmallBizOpp.
Ascensus is the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States. The firm delivers technology and expertise to help millions of people save for what matters most—retirement, education, and healthcare. For more information about Ascensus, visit ascensus.com. View career opportunities at careers.ascensus.com.
In a recent PLANADVISER feature, President David Musto discusses the vital role of small businesses in the U.S. economy and the challenges they’ve historically faced in offering cost-effective retirement benefits.
The total number of American workers without access to an employer retirement plan is 55 million. They comprise the “coverage gap,” which is well-known in the industry. “Less known is the ‘quality gap’ between the thousands of small business plans that do exist and their large business counterparts,” states Musto.
He recaps recent innovations in the public and private sectors that are addressing these “twin gaps” and the impact of these enhancements on financial advisors’ practices and the financial lives of millions of Americans.