Small employers' 401(k)s could be big business for advisors

Small businesses hold big opportunities for financial advisors — especially when it comes to helping them offer  401(k) retirement plans to their employees.

A new study from Vestwell, a New York-based recordkeeping company for employer-sponsored retirement plans, found that many smaller employers are upgrading their 401(k)s, and they're seeking professional advice on how to do it. Of the 250 businesses Vestwell surveyed — most of which had fewer than 100 employees — 44% said they're planning making changes to their 401(k)s this year, including by raising their contribution match, adding auto-enrollment and other adjustments.

That's good news for advisors, because employers want their help in implementing these changes. Fifty-seven percent of the businesses said an advisor "adds value" by consulting on plan design. Another 65% said they want advisors to give investment recommendations. 

Small enterprises are the economic engine of America. Small Business Administration data show 32.5 million such companies in 2021 employing more than 61 million people in 2021. That's 99.9% of all businesses in the country, and nearly half, or 46.8%, of all workers. Small enterprises generate around 44% of all U.S. economic output. Still, nearly three in four businesses, or 74%, don't offer a 401(k), according to the National Association of Plan Advisors.

For wealth management professionals, it all adds up to one thing: a lot of potential new business.

"Financial advisors have an incredible opportunity to harness the momentum in the industry for their own practice growth," said Aaron Schumm, the CEO of Vestwell. "It's clear that small business owners see the value that the expertise of a financial advisor can bring to their business."

There's also a big role to play in education: 54% of employers want advisors to train them on plan administration, and 62% want them to teach employees about their 401(k)s. In fact, nearly half, or 47%, said educating employees was the most valuable thing an advisor can do. Workers are interested too — 90% of employees said they want their companies to provide retirement education.

"Think of a small business — it's rare that there would be a benefit team," Schumm said. "So they turn to the advisor, who essentially becomes an extension of the benefit arm of the small business."

In the United States, the 401(k) is by far the most common type of employer-sponsored retirement plan. In total, there are about 60 million active 401(k) participants, with a combined $7.7 trillion in assets — 70% of the total savings in all direct-contribution plans, according to the Investment Company Institute.

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Vestwell expects those numbers to rise further. One major reason is SECURE 2.0, a package of retirement reforms that Congress passed late last year. Among other measures, the law mandates automatic enrollment in all new 401(k) plans, starting in 2025 (except those of churches, government agencies and businesses with fewer than 11 employees). This could make a big difference; one study by Vanguard found that auto-enrollment tripled the number of new hires who signed up for their plans — from 28% to 91%.

Meanwhile, small businesses, typically defined as those with fewer than 500 employees, are making their own efforts to get their workers to sign up. Of the employers Vestwell surveyed, 41% increased their contribution match, 31% introduced auto-enrollment and 18% relaxed their criteria for employee eligibility.

If all these efforts succeed, Vestwell believes small businesses could become a wellspring of new clients for advisors.

"Where employers are expanding their benefits, advisors are expanding their practices," the study said. "In other words, the small business market is on track to become a big business."

Many in the industry already see this potential. In its survey of nearly 500 advisors, Vestwell found that 40% expect their practice to grow significantly as small businesses expand their plans.For Schumm, the takeaway from all this data is simple:

"Don't ignore small businesses," he said. "Everyone should be thinking about how to engage with the small plan market, because it's growing very, very rapidly."