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New tech-forward companies are shaking up the competitive landscape in the micro 401(k) market as recent legislative action seeking to close the retirement gap is making it a more lucrative segment, according to Cerulli Associates' most recent retirement report. But whether these new entrants can provide the level of service small businesses need as their workforces grow and evolve is a more complicated question.
Micro 401(k) market increasingly attractive
Traditionally, the micro 401(k) market — or plans with less than $5 million in plan assets — has been less attractive to new recordkeeper entrants because of the challenging economics of serving a large number of relatively small plans, said the report.
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However, tax breaks and recent legislation designed to encourage uptake of retirement plans in the small business space are encouraging new players to enter the recordkeeper space. Companies including Betterment for Business, Guideline, Human Interest and Ubiquity are now joining more established players like American Funds, Ascensus and John Hancock to address the micro 401(k) market, said Cerulli. These tech-forward companies are coming into the market, Cerulli said, with low-cost, easy-to-onboard 401(k) solutions for employers offering a workplace retirement plan for the first time.
New entrants are different
These new entrants differ from established players in a few key ways. Traditional players typically use proprietary investment products in the micro space, and many solutions bundle recordkeeping with a selection of fully or mostly proprietary investments, according to the report. Other asset managers offer bundled solutions through a partnership with a third-party recordkeeper.
Newer entrants focused on the micro market are not true asset management firms but instead are pure-play recordkeepers, said Cerulli. These providers are offering unbundled solutions that feature mostly low-cost index funds from third-party asset managers. In addition, many newer entrants use their own proprietary underlying recordkeeping technology, while many established players rely on technology providers such as FIS, DST and Ascensus to provide underlying recordkeeping functionality for their platforms.
Startup plans represent an important source of new business in the micro 401(k) space, especially for new entrants that are aiming to distribute solutions directly to plan sponsors rather than via advisors.
Newer entrants frequently market their solutions as easy to onboard, low-cost digital options for employers who want an off-the-shelf product. In some cases, these providers also are taking on administrative and investment fiduciary responsibilities that are otherwise shouldered by a plan sponsor, third-party administrator, advisor or third-party fiduciary service provider. Cerulli notes that there is a distinction between helping plan sponsors with fiduciary duties and officially assuming fiduciary responsibilities.
Payroll integration
Integrating with a payroll provider is necessary for competing in the micro plan market, but there is a distinction between 180° and 360° payroll integration. In a 180° integration arrangement, the payroll provider transmits participant data to the plan's recordkeeper but the plan sponsor or administrator is responsible for sending participant information and changes from the recordkeeper to the payroll provider. In a 360° arrangement, information is transmitted back and forth between the payroll provider and recordkeeper, which removes the burden on the plan sponsor to track and approve contributions and deferrals. Some payroll providers, namely ADP and Paychex, have developed their own 401(k) recordkeeping businesses that offer a sense of simplicity to small plan sponsors who lack human resources capabilities.
As plans grow, will new entrants be left behind?
As small businesses evolve and grow, so too do their plan needs and expenses. Several tech-forward players offer do-it-yourself baseline options with off-the-shelf safe harbor or non-safe-harbor plan design options, but as those companies' needs evolve, they may seek more customized, robust retirement plan options including customized vesting schedules, financial wellness offerings and a broader universe of investment options.
Newer entrants targeting the micro market may find themselves out of their element as plans grow to more than 100 participants and become subject to Department of Labor audits, said Cerulli.
Advisors become key
In addition, advisor relations become increasingly important among plans with at least $1 million in assets. About half of plan assets held in plans with less than $1 million are advisor-mediated compared with about three-quarters of plan assets in the $1 million to $5 million range, said Cerulli. It noted providers that are not plugged into an advisor network are likely to experience difficulty winning business via requests for proposals (RFPs).
Cerulli's study found that most RFPs are triggered by a negative experience with the current recordkeeper, and while small businesses tend to emphasize cost, plan advisors are typically focused on selecting a recordkeeper based on quality of service.
"Providers that distribute directly to plan sponsors should focus on delivering a smooth, albeit flexible, plan administration experience to their existing 401(k) clients to retain these clients as they mature and their plan-related needs become more complex over time," said Cerulli. "This may involve more dedicated relationship management, allowing for greater flexibility around plan design, and a more personalized participant experience."
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM's Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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