Bank Investment Consultant
Retirement plans for small-business owners may well represent the last frontier of true wealth for bank-based advisers afraid of getting lost in a sea of acronyms. But, with a little effort, working these accounts could be the launchpad for a strong business.
Bank investment consultants have a good excuse to sit down with small-business clients to discuss the regulatory changes that will take place over the next few years as a result of the Pension Protection Act of 2006. It’s riddled with savings for business owners, so discussing them will help advisers prove their value to wealthy clients.
And they are lucrative. 401(k) contributions are projected to grow $300 billion a year over the next five years, according to a report by Cerulli Associates of Boston.
And those contributions are likely to hit about $3 trillion a year by 2010. In 2005, small businesses accounted for 38,000 retirement plans.
The Society of Professional Asset Managers and Record Keepers projected 15,000 to 18,000 start-up plans in 2006.
Despite this growth, small businesses remain a huge, untapped market. Only one-quarter of them had retirement plans in place, says Tom Foster, an Erisa attorney, a national spokesman for The Hartford’s retirement group, and co-author of “To Sell or Not to Sell … Employer Retirement Plans.”
Banks can dominate this market because they already have established relationships with business owners.
Small-business owners have three choices of retirement plans for themselves and their staff: a simplified employee pension plan, a savings incentive match plan for employees, or a 401(k) plan.
The Pension Reform Act of 2006 made selling retirement plans to small businesses easier for advisers, because it has expanded the range of benefits affecting charitable donations, nonspousal benefits, and automatic employee enrollment, among other things.
Although many of its provisions don’t go into effect until later this year or next, the law has given advisers good reasons to meet with their small-business clients and discuss retirement plans.
One major development is that the act extended higher contribution limits for both individual retirement accounts and 401(k)s to $15,500 from $10,500. (The higher limit was supposed to expire in 2010.)
The Pension Reform Act also gives business owners an automatic enrollment safe harbor. “If an employer is making a high wage, lower-paid workers have to put in a certain percentage of their pay to allow the business owner to maximize his or her deferrals — and a noncontributing employee counts as a zero,” said Chris Pratt, a senior financial consultant at M&T Bank in Farmingdale, N.Y.
Now, an employee has to deliberately opt out of contributing to a retirement plan. If the employee says nothing, the employer can enroll the employee automatically.
Employees’ participation in small-business plans has been fairly low, and that in turn has lowered the amount the highest-paid employees could sock away. Come 2008, the ability to automatically enroll all employees who do not bother to opt out of the plan could significantly increase the amount employers can defer.
Beyond that, the new law lets business owners stash away more retirement assets than they could before.
“Most businesses think it’s too good to be true,” said Mr. Foster, who assures his clients that it isn’t.
Here’s how: A worker making $30,000 will have that entire wage credited to his or her eventual Social Security eligibility. But a business owner making $100,000 will run $6,000 short, because the amount of salary one can credit to Social Security benefits is capped at $94,000. To make up for this discrepancy, the business owner is allowed to make a larger contribution.
“Anything above Social Security’s wage base won’t get the benefit of the Social Security payment from that excess, so big earners are allowed to put more money away to compensate for that discrepancy,” Mr. Pratt said.
This is particularly useful for business owners who have consistently plowed profits into their businesses and now need to catch up with retirement contributions. “If the business owner has only 10 years until he hits 65 and the $30,000 employee has 30 years, the greater allocation makes up for the fact that the business owner has less time to save,” Mr. Foster said.
Sounds unfair? It isn’t, he said.
“Business owners have put their blood, sweat, and tears into their businesses over many years, and they want to see the rewards from that,” he said.
The law also made permanent the Roth 401(k), a concept that was to expire in 2010.
“Roth 401(k)s are a great reason to go back and talk to business owners — there is no limit on how much they can pay in,” Mr. Pratt said.
Roth 401(k)s are also attractive to business owners who worry that income-tax rates will be higher in the future. “Planning comes in when I show them a combination of tax-deferred and tax-free retirement assets, and how I can help them manage their future tax liability,” Mr. Pratt said.
An added bonus of the Pension Protection Act is that any regulatory changes give advisers an opportunity to sit down with clients to explain the implications — and talk about the client’s account in general in the process. Moreover, because the changes encourage rank-and-file-workers to start saving, advisers are in a prime position to suggest holding an educational meet-and-greet with their clients’ employees, which could lead to managing those workers’ retirement assets down the road.
“We’ll come in and do educational meetings for employees — for many of whom their 401(k) is their biggest asset — and no one’s advised them on allocation,” Mr. Pratt said. “We offer financial planning at no cost to all plan participants. It takes time, but meeting with plan participants once every six months could lead to 50 more clients in the future.” These clients may be smaller, but the business adds up.
For an adviser, this is a triple opportunity: a chance to do more business with business owners, significantly increase fee business quickly by administering employee retirement savings plans, and build relationships with owners and employees that can lead to more business when they retire. Selling retirement plans to small firms is a win-win-win.
