Who benefits from the SECURE Act?

The SECURE Act signed into law on Dec. 20 is being hailed as the most significant retirement legislation enacted in the past decade. It provides incentives to get more small businesses to offer retirement plans for their employees and to boost retirement savings generally.

For the act to meet expectations, more small businesses need to be inspired to offer retirement plans. Recognizing this, lawmakers created a new form of multiple employer plan, known as a “pooled” MEP or PEP. A PEP allows unrelated small employers to engage a “pooled plan provider” to serve as the ERISA 3(16) administrator and the named fiduciary for their shared plan. PEPs are designed to help participating employers reduce costs, administrative duties and fiduciary liability (though employers retain fiduciary responsibility for their selection and monitoring of the pooled plan provider).

Financial service companies will serve as pooled plan providers and will undoubtedly market their PEPs directly to business owners. But owners are unlikely to act without the active involvement of a financial adviser in the decision-making process.

Retirement advisers should take a deep dive into the data about small businesses (defined as independent business having fewer than 500 employees) to understand the PEP market before deciding whether and how to serve it. According to the U.S. Small Business Administration:

• There are 5.9 million small businesses that have paid employees, accounting for 99.7% of all firms with paid employees.

• Small businesses account for 47.3% of all private sector employees and, from 2000 to 2018, small businesses accounted for 64.9% of net new jobs created in the U.S.

• 98.5% of all high-tech employers are small.

• 23.3% of small employers are home-based; 65.3% of professional, scientific, and technical services and 70.0% of information-sector small businesses are home-based.

At a high level, the size of the small business market looks enticing for financial professionals. But there are more numbers for advisers to consider in the process of developing a strategy to provide retirement advice in this market. Here are some important statistics from a recent Small Business Association blog post:

• Percentage of businesses that already have retirement plans:

• 45% of firms with 1 to 49 employees.

• 76% of firms with 50 to 99 employees.

• 90% of firms with over 100 employees.

• 89% of all employers have fewer than 20 workers.

• 35% of employees consider retirement benefits a key reason to take a job.

• 47% say retirement benefits are an important reason to stay with the employer.

These statistics tell us that the market for retirement advice is biggest among very small employers and that having a quality retirement plan helps to attract and retain talent. These are the right conditions for PEPs; however, as the IRS web site that provides resources for small businesses points out, there are at least eight other retirement plan options for these small businesses to consider. Consequently, advisers seeking to provide retirement plan advice to small business owners will need to get up to speed on the features and benefits of PEPs relative to other available options.

The question is, can a retirement plan specialist have a viable business concentrating on this market? While the answer is uncertain, focusing exclusively on retirement advice in the micro-market would be challenging because retirement plans compete with other priorities for the scarce resources of small businesses. Cash flow issues are the No. 1 cause of small business failures.

A better approach may be to provide holistic advice and help with prioritization of financial objectives. Business owners must balance saving and investing with managing liquidity, credit, insurance and tax issues. Bluntly, what a small business owner typically needs is a financial planner who understands small businesses and can deliver solutions in concert with product and service specialists operating as a team or arranged through referrals.

Cerulli Associates and other researchers have recently uncovered general trends of increasing client preferences for holistic advice that is fee-based rather than tied to products or transactions. In the world of entrepreneurs, many of whom are home-based, these trends can be particularly powerful.

Advisers in this space may also need to offer a flexible service delivery model that adapts to nontraditional career paths. The planner can help orchestrate technology-driven solutions for managing cash and savings programs, and provide adviser-assisted or adviser-directed services as more complex needs arise.

By providing holistic advice, a financial planner would be well positioned to work with employees as well as business owners. By concentrating on businesses in high tech and other professional fields, serving the micro-market would be more economically viable.

It’s also worth noting that the demographics of entrepreneurship have shown dramatic shifts over the past two decades. Minorities, women, and immigrants play a large and expanding role in the economy as small business owners (see the Kauffman Indicators of Entrepreneurship).

While women and minorities have historically been dramatically underrepresented in financial services, this may slowly be starting to change. The Certified Financial Planner Board of Standards Inc. recently announced that the number of CFP professionals increased by 3.9% in 2019. The number of new female certificants rose 4% and the number of black and Latinx CFP professionals grew by about 12%.

It may be that the demographic composition and skill sets of the next generation of financial advisers will be better positioned to serve the small business market.

[More: Proposal to amend SEC testimonial rule to greatly expand advisers’ advertising efforts]

Blaine F. Aikin is executive chairman of Fi360 Inc. and Cefex.