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Advisors Expect ‘Significant Practice Growth’ in Small Plan 401(k) Market

Industry Trends and Research

New state mandates, tax incentives and other factors are leading many plan advisors to anticipate significant practice growth in the small plan 401(k) market in the coming year.

Results from Vestwell’s fourth-annual Retirement Trends Report reveal that 40% of advisors anticipate their practice to grow significantly as a result of an expansion in the small plan market. Also of­ note is that over 70% of­ advisors said that recent market volatility has not aff­­ected their retirement business in the small plan market within the last year.

These findings are based on a series of surveys Vestwell conducted in the summer and fall of 2022 to identify the ways in which technology and new savings products are transforming the retirement industry. The firm surveyed more than 1,300 employees, 500 advisors and 250 small business owners across the country.

While the surveys were conducted before the SECURE 2.0 Act was enacted, the results suggest that increases in the tax credits available to small employers that open a new plan may also contribute to advisors’ interest in expanding their business. Not only can the law be expected to increase the number of plans that are offered, but its auto-enrollment features can also be expected to increase the average value of each plan, the report contends.  

“Regulatory tailwinds and advanced technologies have enabled a monumental shift in the industry, expanding retirement access to small businesses and savers that are historically difficult to reach,” observes Vestwell founder and CEO Aaron Schumm.

Benefit Offerings

Further supporting the expansion argument is that the ongoing war for talent has small business employers looking to boost their benefits offerings to address employee demand for additional savings opportunities. The report found that an overwhelming majority of employee respondents rank employer-sponsored retirement programs and employer matching as a top priority. In fact, of the nearly 1,300 employees that participated in the survey, over 72% of them said they “expect employers to offer a 401(k)/403(b)” considering the tight labor market.

To that end, the survey found that almost a quarter (23.7%) of participating employers increased their 401(k) match last year. Excluding employers who made no change at all, the increased match was by far the most popular enhancement, representing 41% of plan changes. What’s more, for employees who are not yet contributing to their retirement plan, an increased match was one of the most powerful motivators for getting started, behind only an increase in salary. Vestwell also reports that, among employers who made a change to their plan in the last year, 18% relaxed their eligibility standards over this time.

For advisors, more than half (55%) indicated that they are utilizing managed accounts to better serve their clients and 18% who do not currently offer managed accounts intend to introduce them in the next year, the survey found. Many advisors are also looking to expand their offerings to include new savings vehicles, including interest in adding health savings accounts (HSAs) (46%), 529 plans (32%), and emergency savings accounts (19%) in 2023.

Advisor Relationships

And with an eye on expanding benefit offerings, employers apparently are seeking deeper relationships with their advisors, giving an advantage to those who can scale their practice e­­ffectively while providing personalized recommendations to their clients, the report suggests.  

When asked what they look for in a relationship with their advisors, the top three qualities employers listed were:

  • recommending and monitoring plan investment;
  • educating employees; and
  • recommending plan design.

In fact, an overwhelming majority of both small business employers and employees (90%) are interested in utilizing the support of a financial advisor to guide them through their options, the report notes. Additionally, nearly half (47%) of employers believe that advisors add the most value when educating employees about 401(k)s and investment decisions. Advisors also believe the area where they add the most value is employee education (22%), followed by plan administration education (21%), plan design recommendations (21%), investment recommendations and management (20%), and fiduciary oversight (16%).

These findings result in an interesting dynamic, the report suggests. Savers want their employers to be more involved with retirement education; employers wish advisors provided more education; and advisors see offering educational resources as one of their key value propositions.

“It’s clear that small business owners see the value that the expertise of a financial advisor can bring to their business. In today’s competitive market, it’s essential for small businesses to attract and retain top talent. Working with a financial advisor not only sets these businesses up for success, they can also support the growth of their benefits offerings as their businesses grow,” Schumm further emphasizes.

Among the survey group, 80% of small businesses were found to work with a financial advisor and 34% of employers came to offer a retirement plan as a result of an advisor or accountant’s recommendation.