Retirement Planning for Small Businesses: What Advisors Need to Know

Increasingly, advisors are diversifying their service offering to provide a more holistic wealth management experience for their clients. They offer financial planning, estate planning, retirement planning and more—but there’s one domain of financial advising that still seems like it belongs to specialists: Retirement planning for small businesses.

Maybe it’s because advisors are used to serving individuals rather than organizations, or maybe it’s because of the additional compliance requirements associated with small business retirement planning. Whatever the cause, breaking into this space can feel like a big lift. In this blog, we’ll explore why that might be the case and how advisors can make the transition easier.

Why Do You Want to Provide Retirement Planning for Small Business?

If you’re considering providing retirement planning services to a small-to medium-sized business (SMB), you might be excited about all of the new assets you’ll be managing. After all, you could transform your practice if you get to levy your regular fee of 1 percent on, say, the $20 million worth of assets in an entire employee base’s retirement accounts.

Unfortunately, advisors thinking along these lines need a quick reality check: the retirement market simply won’t bear a 1 percent fee. Often, financial advisors that provide retirement services for SMBs charge a different, lower fee for their retirement services compared to their other regular financial advising services. We typically see retirement services netting less than 50 basis points.

But that doesn’t mean there aren’t significant benefits to be realized by offering retirement plans for small businesses—especially when you start thinking beyond the pure dollar value you stand to gain.

Advisors who provide retirement plans to small businesses gain three key benefits.

1. A New Revenue Stream

Yes, we did just claim that there’s more to offering retirement planning than just its direct dollar value, but we shouldn’t gloss over this benefit either. Although your fee will likely be lower when providing retirement services, the amount of assets under management (AUM) in retirement plans more than makes up for it. Retirement planning can thus be an excellent and consistent way to generate revenue for your practice.

2. More Involvement with Existing Clients

The most common way for financial advisors to break into retirement planning for SMBs is through providing regular financial advising for a small business owner.

It’s a fairly natural transition—small business owners often have assets that require a financial advisor’s management, and their business is going to be their largest asset. Part of managing that asset is offering retirement planning to its human resources.

And most importantly, if you have a client that is a small business owner and they’re not getting retirement services from you, they are getting retirement services from somewhere. Offering that service makes you stickier and helps you provide a more holistic wealth management experience to your clients.

3. A Source of New Clients

By offering retirement services to an SMB, you’ll also be talking to employees about their options and providing your recommendation about what plan they should choose. You’ll likely spend even more time with the highly compensated employees of the business. While these individuals won’t be clients of yours per se, there is the opportunity to market your practice and potentially gain a portion of the employee base as bona fide clients.

The Challenges You’ll Need to Overcome

Going from 1:1 to 1:Many

As a financial advisor, you’re probably used to having close conversations with individual clients. Occasionally, their family members might get involved, but it’s unlikely that you’re used to interacting with a large cohort of individuals.

It’s going to be tempting to minimize the amount of time you spend with your clients’ employees. You’re very busy, your clients’ employees aren’t clients themselves, and it seems easier to just make your recommendation and let them take it or leave it.

But being too peremptory with your clients’ employees reduces the likelihood that you’ll win their business later on and, in the worst case, can distress your relationship with the business owner. One of the elements of a successful retirement service offering is having the time needed to focus on these individuals.

Designing the Plan to Meet the Sponsor’s Goals

Retirement plan design can be like learning a new language for financial advisors. The plan sponsor (i.e., the business owner) is going to have goals for their employees and their business, and it’s going to be your job to design a retirement plan that most effectively supports those goals.

For example, how do you design a plan that’s exempt from non-discrimination testing? Is a safe harbor match plan appropriate? How should plans differ when the workforce is predominantly younger or predominantly older? Is a new comparability plan a good fit for your client’s business? What is an SDBA, a QDIA plan, or the rest of the alphabet-soup-style nomenclature common to this space?

There’s a learning curve, to be sure. But by putting the time in, you’ll be well positioned to provide your client with a highly competitive retirement plan—one that does everything they need it to.

Conducting Retirement Portfolio Analysis and Management

As with your other clients, you’ll need to design and manage the plans available to your clients’ employees. Retirement portfolio analysis and management is, in many ways, a different beast from typical portfolio management. For example, you would normally be able to communicate one-on-one with a given client about their portfolio; since you provide retirement plans to all of a client's employees, there’s less opportunity for communication and expectation setting.

This will also be an additional task to handle in your investment management process. Investment management is already a time-consuming process, so tracking the market, making any adjustments (depending on the nature of your plan), and re-evaluating every few years to stay competitive can take up more time than you have to offer.

The Best Way to Make Offering Retirement Services Easier?

For most advisors, working with an outsourced 3(38) investment manager is their best approach.

Section 3(38) of ERISA defines the fiduciary responsibility of an investment manager for an employer’s retirement plan. By default, this person is the employer, though by serving as their financial advisor, that responsibility will shift to you. Fortunately, there are organizations you can work with to serve as your client’s 3(38) investment manager. Here’s why that makes the shift to offering retirement services easier:

• You don’t have to be an expert in retirement plans; instead, you just have to work with one.
• You’ll be able to focus on gathering requirements from and building a relationship with your plan’s sponsor; your outsourced 3(38) will translate those needs into a well-designed plan.
• You won’t have to spend extra time on the portfolio management and analysis side of things; your outsourced 3(38) will have a fiduciary responsibility to do that for you.
• You’ll have more time to connect directly with your plan sponsor’s employees, thereby maximizing the chances that you can convert them into clients.
• You’ll carry less liability since you’ll be working with an organization holding a fiduciary responsibility.

A Quick Caveat

While 3(38) outsourcing is a great way to gain that essential client time every advisor needs to prioritize, some providers may not be an ideal fit. Especially in the SMB space (which we assume are the types of retirement clients that retail financial advisors are serving), many providers for 3(38) outsourcing offer proprietary plans, sometimes advertised as “free.” It shouldn’t come as a surprise that these plans typically take a hefty fee, sometimes as much as 200 basis points on the funds.

Talk to an AssetMark Retirement Consultant

We’ve taken on 3(38) responsibilities for numerous financial advisors in the past—and we provide a curated list of reasonably priced plans, not a one-size-fits-all proprietary plan with excessive fees.

What’s really unique about our retirement support is that we provide a dedicated retirement consultant to each financial advisor as well as relationship managers. Other providers leave their advisors with an 800 number to call at best; we provide real professionals whose only job is to support your retirement portfolio management, facilitate your client relationships, and help you succeed. Schedule a consultation today to walk through the first steps to take in adding retirement services to your practice.