PLANADVISER - September/October 2018 - 24

Retirement
Benefits for the
Fastest-Growing
Segment of
the U.S. Economy
David Musto,
President of Ascensus
A
dvisers angling for new business might rethink their
need to hook a whale. There are many small fish in
the sea, and " if you aggregate the collective weight, it
adds up, " says David Musto, president of Ascensus.
Small businesses have historically presented challenges for
adviser and company owner alike. Now, however, they are poised
to gain from the retirement industry's evolution. The confluence
of changes in plan design, technology, the workforce, and, potentially,
legislation now make the small plan market increasingly
attractive and rife with opportunities, Musto says.
For one, the small business sector is no drop in the ocean: It
accounts for 99% of U.S. businesses. It employs 48% of the entire
American workforce, or over 59 million employees, and creates
63% of the nation's new jobs annually. Further, 81% of small
businesses are sole proprietorships, with 51% of their owners over
age 50 and focusing on preparing for retirement.
The growing gig economy also contributes to the numbers-
maybe as much as 13.3% to the total workforce, according to the
U.S. Small Business Administration.
" We often think about gig workers in the context of Uber and
the 'on-demand' economy, or as service labor, many of whom
are still in school, " says Musto. " But we're also seeing an increase
in professional roles-engineers, attorneys, technology workers,
and even entrepreneurs may be considered gig workers. "
One particular segment of this group " will be substantial
savers a few years down the line. " What wealth managers have
called HENRYs ('high earning, not rich yet'), these individuals
are still paying down student loans and saving for their first
mortgage. " In the gig economy, there's great opportunity for
advisers to help workers who need substantial guidance with
regard to choosing benefits strategies and retirement plans, "
he says.
While many of these individuals and businesses are yet
unserved, the total number of American workers without
access to an employer retirement plan is 55 million. They
comprise the " coverage gap, " well-known in the industry. Less
known, Musto says,
sands of small business plans that do exist and their large
business counterparts.
He details a few of the key differences:
* A small plan will often spend more to offer less than a
large plan does. Morningstar found that plans covering 1,000plus
participants pay 0.4% annually in plan expenses, whereas
a plan covering 50 or fewer participants pays about twice that
much. Scale effects and investment selection are meaningful
drivers of this expense differential.
* Many small companies' retirement plans lack
important plan design features. If the company has a plan, it
is less apt to use automatic features, which could increase participant
savings. As many small businesses are recent startups,
their plans are simple and just beginning to accumulate assets.
Small business employees' wages tend to be lower than those at
large companies, too, which also discourages saving. According
to data from Vanguard, there's a notable difference in employee
outcomes as a result of this gap. The average balance in all plans
is 65% higher than that of the small plan subset.
Musto points to reasons for optimism, however: Competition
and industry innovation are reducing costs and helping quality
plan design migrate from large retirement plans to smaller plans.
Seismic Changes
Affecting large and small plans alike are " seismic changes
occurring in the retirement landscape, " Musto says. If advisers
are proactive, they will gain from-and advance-them.
Several individual states are at various stages of rolling out
government-facilitated auto-IRA savings plans for private sector
workers in businesses that do not offer 401(k) plans. The state
programs currently underway could, by themselves, reduce the
nation's plan coverage deficit by 17%. It is important for business
owners to note, through consultation with their financial adviser,
that the opportunities for annual savings in these programs are
less than those in full DC plans.
At the same time, Congress continues to discuss proposals
is the " quality gap " between the thoufor
open multiple-employer retirement plans (MEPs) that would
allow small employers to participate in workplace savings plans
together with other employers. Such proposals, which have
bipartisan support, could help mitigate the cost and administrative
burdens of plan sponsorship.
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Photography by Matt Kalinowski
PLANADVISER - September/October 2018

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