The race for small-business 401(k)s

Retirement plan providers are increasingly going after business that was once snubbed by the industry as a whole — startup-size 401(k) plans.

Principal announced Tuesday a new 401(k) service, Simply Retirement, targeted at companies with 100 employees or fewer. That service uses Ubiquity Retirement’s record keeping system and includes a range of investments from Principal.

That news came a day after wealth-management firm Rebalance similarly announced its own small-business retirement-plan service, Better K. That service includes a risk assessment for each worker and “provides each plan participant an investment strategy based on their own, personal needs,” the company stated in its announcement.

Record keepers historically have not pursued small employers, given the high costs of operating small individual plans. It’s largely a thin-margin industry that traditional players have looked at as a means to develop relationships with plan participants and win business with them elsewhere, including IRA rollovers.

But technology and automation have made business more efficient, and more providers, including robo advisers, see 401(k)s as profitable.

“Technology is the great equalizer in this,” 401GO CEO Jared Porter said. “It is a profitable business. But it’s also very well-priced and affordable for those [small] businesses [clients].”

401GO launched about a year ago and now has business with about 100 employers, representing a total of about $14 million in 401(k) assets, Porter said. The company typically works with employers that have five to 30 employees, though it has clients as small as sole proprietorships and as large as 200 employees, he said.

Small businesses that hadn’t opted for 401(k)s for their workers in the past now have more incentive because of the SECURE Act, which gives tax breaks to employers that establish new plans, 401GO head of partnerships and business development Aidan Yeaw said.

“The time has never been better for businesses to get 401(k) retirement plans,” he said.

Further, state-sponsored retirement savings programs have raised visibility, as did the SECURE Act’s provision for pooled employer plans (PEPs), he said. The PEPs structure, he said, “is more beneficial for legacy 401(k) providers that have more technology constraints.”

COST CUTTING

In the past, costs and a lack of knowledge about 401(k) options kept small-business owners from offering plans to their workers, said Edward Gottfried, director of product at Betterment for Business.

“In the last five years in particular, there has been a really healthy push to open up access to 401(k)s,” he said. Now, for example, payroll integration is table stakes, and the cost of offering a plan is much lower, he said.

“There’s a market that’s pretty easy to mobilize and capture, as long as you understand that it doesn’t have to be expensive,” he said. “Many providers see the 401(k) as an opportunity to help individual savers build good habits.”

That can certainly lead to other business relationships with those clients down the road, but that isn’t necessary for a retirement plan business to be successful, he said.

Betterment for Business, which launched its 401(k) service in 2016, has about 500 retirement plan clients and works with businesses ranging from two employees to thousands, he said.

The COVID-19 pandemic hasn’t discouraged small employers overall from adding 401(k)s, he said. The crisis has highlighted the importance of financial planning and emergency savings, which has made employers eager to provide a wider range for financial services to their workers, he said.

“A lot of employers are excited about offering a 401(k) in tandem with a more holistic financial wellness package,” he said.

The new Simply Retirement service from Principal charges employers a one-time fee of $500 to establish a plan, as well as a $150 monthly record keeping fee. Participants in the plans also pay $6 per month for record keeping services, according to Principal’s announcement.

“Users can create 401(k) proposals quickly online through a straightforward process that reduces paperwork,” the company state. “No in-person meetings are required.”

The other new service, Better K, uses EPIC Retirement Plan Services as the record keeper. That service “can reduce [a business’s] annual 401(k) fees by up to 50%,” according to an announcement from Rebalance.