SunTrust Banks Inc.'s launch in April of a retirement plan platform for small employers seems like a no-brainer. According to ING Direct, just 20 percent of U.S. businesses with fewer than 25 employees have retirement plans, and the rest of the market is not much further ahead. What's more, SunTrust's own survey indicates small businesses overwhelmingly want to offer 401(k)s and similar plans to their employees.
"We were encouraged by the fact that 85 percent of them said — even during this period of turmoil — that having a retirement plan is really important," said Brenda Seliga, head of employee benefit solutions at SunTrust. Yet if SunTrust's small-plan retirement business succeeds, it will be a noteworthy achievement. Most banks have taken a pass on the business, and many of those that have tested it have floundered. The problem, they've found, is that sales to small employers generate little profit. "The economics of the market make it a difficult one to service," says Rick Meigs, president of 401khelpcenter.com LLC.
Still, interest in serving this market is picking up, in part because the market for large plans has matured, says Meigs. Indeed, he says plan providers have become increasingly interested in firms with as few as one employee.
SunTrust, which already offers plans to larger employers through its brokerage channel, hopes to succeed in the under-100-employee sphere by using online automation and selling retirement plans in tandem with other small-business products, says Seliga. It will collect fees as the plans are set up, and it stands to earn investment management revenue as well because its RidgeWorth Capital Management Inc. unit will be among the advisers available to participants.
The bank's plans center around a Web-based tool provided through ePlan Services Inc., in Denver. The SunTrust Online 401(k) allows companies with 100 or fewer employees to quickly establish plans online and choose from more than 200 investments. The quick setup and simple maintenance cater to small businesses that traditionally balk at a perceived complex, paper-heavy undertaking. Its features run the gamut from online account access for employers and employees to annual compliance testing and a retirement planning education portal for participants.
SunTrust and ePlan provide retirement specialists to assist small businesses over the phone with setting up and running the plans. The question is whether the Web-and phone-rep combination will provide enough human touch to satisfy a cross-section of small businesses, says Andrew McIlhenny, an executive vice president with Firstrust Financial Resources, in Philadelphia. Starting 10 years ago, Firstrust, a unit of Firstrust Bank, has used its advisers' relationships with small business clients to build a profitable 401(k) line consisting of 100 plans. While the more tech-savvy entrepreneurs are good candidates for a Web-based approach, says McIlhenny, there is a sizable chunk of business owners for whom personal advice is indispensable.
Such an approach explains why insurers, with their armies of reps, have established a larger presence in the small-business retirement plan market, says Meigs.
Firstrust offers its 401(k)s as a complement to products such as insurance and investment planning, and SunTrust's effort is grounded in the same approach. Its Online 401(k) is built to work with its online payroll and cash management products. Those products, along with other small business services, are marketed together.
One bank making headway in the small-plan market is ING Direct. Since 2005, it has installed 2,000 plans through its Web-based Sharebuilder 401(k) product. Sharebuilder, which offers inexpensive exchange-traded fund shares as investments rather than the typical mutual fund shares, increased its plan total by 34 percent last year, says Stuart Robertson, general manager of ING's ShareBuilder Advisors LLC.
Even in a down market, business owners recognize the importance of 401(k) plans for employees, and they value their tax benefits, he says. ING Direct's approach is unapologetically low-touch. "Our strategy is that we have no feet on the street," Robertson says. "We're all about how you keep the costs out and make it intuitive and easy."
Robertson says that Sharebuilder 401(k) is meeting its growth goals, but declined to say whether the business is profitable. But there is no shortage of opportunities in the small-plan market, he says. "You're finally seeing providers asking how they can serve this market," he says. "I still think we're on the cusp of it."