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Wealth think: How to tap the swelling 401(k) plan market to grow your practice

This reprinted article first was published by Financial Planning on June 6, 2024.

A boom in new small 401(k) retirement plans sparked by SECURE Act 2.0 is creating a huge opportunity for financial advisors to help address the retirement coverage gap as they grow their businesses. 

But capitalizing on this opportunity requires traditional wealth advisors to expand into the often unfamiliar territory of defined contribution plans. Enterprise firms, both large and small, are more than capable of meeting this challenge and turning it into a client acquisition opportunity — if they partner with the right service providers and deploy easy-to-use tools across their tech platforms.  

In 2022, Congress passed the SECURE Act 2.0, which made it easier and more affordable for smaller businesses to provide 401(k) plans to their employees. The law is incentivizing a wave of new plans. State mandates requiring companies to enroll employees in state-run IRAs or 401(k) plans are driving even more growth.

The number of retirement plans in the United States is rising fast. From 2021 to 2022 the total number of 401(k) plans jumped by almost 14% to nearly 721,000, according to a PlanSponsor 2023 recordkeeping survey. Cerulli Associates projects the number of 401(k) plans in the U.S. could jump by more than a quarter to top 900,000 by 2028. By also requiring new plans to automatically enroll employees and gradually increase default contribution rates (subject to an employer opt-out), the law will create a new generation of retirement savers with a growing pool of retirement assets.

The expanding universe of participants in small 401(k) plans should be a prime source of growth for wealth management firms and individual financial advisors. High earners who may be in these plans and need financial advice are potential new clients. Most retail advisors have clients who are business owners or senior executives at companies who need assistance looking at their entire financial portfolio. This puts advisors in a strong position to win, or at least compete, for that business.

In addition, onboarding retirement clients creates relationships in which plan participants get to know the firm and the advisor, and firms and advisors come to understand the client's overall financial situation and goals. This creates further opportunities to cross-sell wealth services to plan participants.

Advisors should first choose the right partners in the retirement plan ecosystem to drive value for their clients.

This is a foundational step as not all providers handle startup plans, which will be a focus for many entering the retirement business. To hit the ground running, advisors should locate experienced industry vendor partners who are aligned with their business model. They should also consider partnering with recordkeepers who can facilitate applying for SECURE Act tax incentives, which can cover most startup costs. And it's also important for advisors to work with providers who do not compete for their plan business.

Next, build a strong relationship with the marketing and sales leadership inside the provider organization; this will play a pivotal role in creating opportunities to connect the advisor with plan participants.

It's critical that the advisor understand the details of how the communications, marketing and conversion process will work. The advisors should ask and get clear answers to questions including: What is the digital communications strategy to communicate with participants, especially unenrolled and under enrolled participants? How does the advisor get looped in by the provider early in the lifecycle of the participant converting to an IRA?

Another critical step is compliance and understanding what it means to be a fiduciary to the plan. One option is to receive training through a designation program. Designations and certifications, like the Accredited Investment Fiduciary® Designation for individuals or the firm-level CEFEX certification, can signal to your client that you are ready to deliver these services. 

In states like California and Illinois, companies face mandates to start a 401(k) plan, move employees into the state-run IRA program or be fined. Advisors can leverage this to win new clients. For instance, some advisors in these states are approaching small business owners with offers to help them start 401(k) plans to avoid penalties. This allows advisors to demonstrate their investment competence, thereby building trust and a potential bridge to winning that small business owner as a client.

Other advisors are also reaching out to obtain plan participant data from recordkeepers. Fintechs have developed technology that allows advisors to aggregate participant data, identify cohorts with unique needs and deliver more personalized advice. Some of these participants are nudged to increase their 401(k) contributions; others can turn into direct wealth clients.

In the past, the complexity and inability to scale profitably in the small retirement plan space has resulted in advisors turning away such business.

Today, financial advisors have access to a wide range of integrated fintech tools that are facilitating the ability to service both retirement and wealth clients. Going forward, advisors' ability and willingness to adopt these tools will play a huge role in determining which advisors are able to grow their businesses and which advisors see their franchises start to dwindle as clients seek better experiences.

Clients accustomed to the seamless service of Amazon and Apple are now demanding the same type of experience from all other companies and providers — including their wealth advisors. Technology products can help advisors meet these rising expectations by automating much of the work around core operations tasks like enrollment, back-office trading and custodial services, rollovers, benchmarking and disclosure and documentation requirements. At the same time, digital offerings enhanced with artificial intelligence allow advisors to personalize the service they deliver.

Because most of these tools are delivered through the cloud, they allow firms and advisors to quickly scale businesses without building out a big technology infrastructure. That keeps costs low and, in many cases, significantly reduces costs.

In the 401(k) market, providers are offering turnkey solutions covering everything from plan design, setup and payroll integration to open-architecture fund platforms and online plan management. These systems are designed to integrate into existing technology platforms, making it easy for wealth management firms and advisors to meet the needs of both retirement and wealth clients.

So seize this opportunity created by the boom in small retirement plans and grow your advisory business while adding value for your new and existing clients. Put these suggestions to work for you today and embrace the challenge.

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