Micro Plan Market to Account for 9 in 10 401(k)s by 2029: Cerulli
The biggest growth in the number of 401(k) plans offered in America over the next five years will overwhelmingly come from the small or “micro” 401(k) plan market—consisting of plans with less than $5 million in assets, according to new data from Cerulli.
According to the July 15 Cerulli Edge—U.S. Retirement Edition, Cerulli expects 92% of all 401(k) plans will be in the micro plan segment by 2029. The financial services industry market intelligence firm forecasts there will be more than one million 401(k) plans by the end of the decade—an increase of 36% over the next five years.
Why the explosion in the number of plans? Cerulli says it is due to incentives provided by SECURE 2.0 and more states implementing mandates to increase the number of individuals covered by some form of retirement savings vehicle.
The number of 401(k) plans has already grown significantly in recent years. Approximately 150,000 new 401(k) plans were added between 2018 and 2023, with nearly two-thirds of these plans added in 2021 and 2023, the Cerulli research revealed. Much of this growth is from employers starting new plans.
Recordkeepers eager to tap into this micro plan growth will need to adapt to the challenges of pursuing small businesses and align with the needs of plan sponsors in this market segment.
“Micro plan sponsors are more cost-sensitive than larger employers and place more emphasis on brand. Retirement income options and financial wellness are lower priorities when considering which recordkeeper to work with,” said Chris Bailey, Director, Retirement at Cerulli.
Digital recordkeepers have also established a competitive position in the micro and small plan market. These providers bring a technology mindset to the retirement market along with newer, more efficient recordkeeping platforms, the Cerulli Edge report said. Their competitive positioning speaks to the biggest priorities of plan sponsors in this segment: cost, easy implementation, and simple administration. This different operating model, coupled with what appears to be a strong understanding of the needs of their target market, has positioned them to challenge incumbents for micro plans and startups.
Opportunity for wealth advisors
Cerulli also expects that wealth advisors will play a larger role in the micro market, as their home offices encourage them to pursue retirement plans as a means to grow their wealth management practices. A few recordkeepers with a long-term commitment to this segment have the capabilities to tap into the growth generated by wealth advisors.
“Recordkeepers seeking to win over these advisors and find success in the micro plan market should, if they have not already, be investing in resources to lower the barriers for wealth advisors,” Bailey said. “Given the large number of wealth advisors, firms will need to develop scalable sales and recordkeeping solutions designed to help advisors who have little knowledge of the ins and outs of retirement plans.”
Looking ahead, the distribution and competitive dynamics of the micro market will shift notably in the next five to 10 years.
“Recordkeepers looking to compete in the micro market should consider investing in small business data sets to identify, prioritize, and market to employers that do not have a retirement plan, if they aren’t already,” Bailey added. “This data can also be used to power prospecting tools for advisors—investing in support for wealth advisors looking to enter the defined contribution space will help make a recordkeeper an advisor’s ‘go-to’ for micro plans.”
Incentives helping growth
Changes at both the federal and state level are driving the increase in small business retirement plan adoption, with SECURE 2.0 tax incentives easing the burden of starting up micro plans and state auto-IRA program mandates encouraging small businesses to provide their own plan instead of opting employees into a state-run plan.
Among the advantages of offering a retirement plan include a boost in attracting and retaining talent; various tax advantages; higher contribution limits, access to Roth 401(k)s; and employee loan options. Thanks to certain SECURE 2.0 provisions, offering 401(k) plans can be nearly cost-neutral for a small business, particularly in the first three years.
Small businesses have traditionally shied away from providing a retirement plan, with most thinking that they are too small and providing a plan would be too expensive.
As recently as 2023, Capital Group surveyed over 600 small business owners and their employees, and found that only 28% of businesses with less than 10 employees offered retirement plans and 51% of organizations with 10 to 24 employees provide a plan.
Perceived ideas of cost were a main factor for not offering a 401(k), the research found, as more than a third of small businesses (34%) cited plan expense as their main concern. This was followed by 33% who said their company was not big or stable enough, 26% who cited limited administrative resources, 25% with too few employees or too high of a turnover rate, 21% who said it was too risky, 20% who believe there is a lack of employee interest, and 19% who aren’t sure where to start.
SEE ALSO:
• How Micro 401(k) Plans Will Drive Growth of Retirement Market
• Capital Group Enhances SMB Retirement Plan Service Capabilities
• Unlocking SMB Market Success with 401GO’s Stan Smith
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
