Next week, businesses in California with at least 50 employees will have to offer retirement-savings accounts, whether in the form of the state-sponsored automatic IRA or a third-party option.
That state mandate, like numerous others that have been implemented or passed by legislatures, is expanding retirement plan coverage. Still in their early stages, though, these initiatives are already showing the potential for massive business in the future for companies that specialize in 401(k)s and IRAs for small employers.
In short, small businesses are being told to sign up for coverage. Fintech firms and established 401(k) providers see an opportunity to showcase their services as an alternative to state-run programs before what is essentially a brand-new market.
Betterment, for example, has been doing targeted campaigns for employers, including content and webinars about what the different state plans offer, through LinkedIn and other mediums.
“We’re certainly putting out the message in these states,” said Kristen Carlisle, general manager at Betterment for Business.
Small-business owners that haven’t considered offering plans to their employees before are often unaware of the key differences between payroll-deducted IRAs and 401(k)s. Part of Betterment’s message is that employers can’t expect to sign up for coverage at the drop of a hat — they need to plan ahead in order to have a 401(k) or IRA up and running by the different states’ deadlines, Carlisle noted.
California’s deadline next Wednesday “was what really prompted people to pay attention,” she said. So far, 11,000 employers have signed up for that program, accounting for 350,000 workers, according to the state.
Other states, including Oregon and Illinois, have active programs. A total of 14 states and two cities have passed legislation for auto IRAs or other programs, according to Georgetown University’s Center for Retirement Initiatives.
Such initiatives have been made to help workers save for retirement, as only about half of private-sector employees have access to payroll-deducted savings at work.
“There is some education that had to be done in the market about how you actually institute a retirement benefit for your employees,” Carlisle said. Prior to the state initiatives, “small businesses weren’t really thinking about the role that they have to play in helping their employees save for retirement.”
The plans that are being started by Betterment clients in states with IRA programs are for companies with an average of 20 to 60 employees. Betterment for Business currently has about 840 plans in its system, according to the firm.
Another firm targeting the forthcoming market of new 401(k) customers, Ubiquity Retirement and Savings, is planning to launch a turnkey payroll-deduction IRA later this year, as well as a pooled employer plan in conjunction with a plan provider and 3(38) fiduciary advisers, CEO and founder Chad Parks said. That firm, which operates on a flat-fee model, currently serves about 5,000 retirement plans, representing 150,000 workers and about $2.8 billion in assets, Parks said.
“We’re making sure we have the full spectrum of solutions available,” he said. “The 401(k) may be too much horsepower for these small businesses,” due to features and complexity that some might not want.
A PEP, for example, provides the benefits of 401(k) but reduces fiduciary responsibility for employers, he noted.
For some plan providers, relationships with the state-run programs have been symbiotic, he said. Initially, though, there was some difficulty overcoming the perception that financial services as a whole was opposed to state initiatives, as some companies advocated against their establishment, he said.
“That put a black eye on the industry in how the states perceive us,” he said. “We had to buffer that negativity.”
The state programs themselves are a positive development for increasing access to retirement savings at work, plan providers who were interviewed for this story said. However, the Roth IRA structure is limited, and many employers are eager for alternatives from the private sector, they said.
And even as California’s CalSavers program gets into full swing, it will likely be a year or two before outside plan providers start seeing their businesses ramp up, they said. The next deadline for CalSavers registration is in a year, when businesses with five or more employees must sign up.
That, Parks said, represents the bulk of small businesses in the state.
And partially because of the pandemic, “we’re about a year and a half behind the curve,” he said.
One firm that is set to benefit in multiple ways from the state auto-IRA programs is Vestwell.
That company is set to take over this year as the record keeper for OregonSaves, through its partnership with BNY Mellon. Vestwell will be working with other state programs in a similar capacity, though the company is not yet disclosing which ones, CEO Aaron Schumm said.
“We’re also seeing the advisers use [state initiatives] as an opportunity to engage in discussion with these businesses,” Schumm said.
PEPs will represent some of the coverage in the future, although there could be more potential for the SECURE Act’s “group of plans” structure that will go into effect next year, he noted. Those plans are similar in concept to PEPs but groups of employers in a single plan design to file one Form 5500 with the Department of Labor.
“We’re going to see more businesses and providers going that route versus the PEP or multiple employer plan structure,” Schumm said. “Whatever construction is best for those businsesses, we want to be in a position to offer it.”
When Vestwell takes over as record keeper for Oregon’s system, the company will have about 20,000 retirement plan business clients, representing about 150,000 workers, he said.
WHERE THE MONEY IS
One sign of the potential in the small 401(k) market is the money behind it. Last week, Guideline announced its latest round of funding, to the tune of $200 million, led by General Atlantic.
Guideline’s retirement business includes 21,000 plans, representing more than $4.5 billion, according to the firm. In total it has raised $344 million in venture capital. The 200-employee firm is planning to add 60 jobs by the end of the year.
This year, 93% of the business the company has added has been with brand-new retirement plans, compared with 91% last year, chief operating officer Jeff Rosenberger said.
“For us, the deadline next year for California will be really impactful,” he said. “We will be doing more specific targeted marking in California over the next year.”
The state auto-IRA programs have also led to more awareness outside of the states with such initiatives, leading other employers to consider adding retirement plans, he noted.
“There’s a general upswell of interest and a more competitive labor market, where small businesses have to compete for talent,” he said.
The company, like others, have opportunities to build business through the payroll companies it works with. Guideline, for example, has relationships with Gusto, Square, Zenefits, Intuit and others, Rosenberger said.
“The market is so big and underserved — unfortunately — that there is a great opportunity for us,” he said.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.