Why SECURE 2.0 and state mandates are powering a micro 401(k) boom

The small and micro 401(k) plan segments are set to rapidly expand over the next few years 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, according to Cerulli Associates. Cerulli expects 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, according to the latest Cerulli Edge—U.S. Retirement Edition.

The number of 401(k) plans has grown significantly in recent years, Cerulli pointed out. 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. Much of this growth is from employers starting new plans. By 2029, Cerulli expects that 92% of all 401(k) plans will be in the micro plan segment, representing a nearly 40% increase in micro plans from 2022.

Defining micro plans

“Micro simply speaks to the size of the plan in terms of assets,” said Chris Bailey, as he explained what micro plans are. Bailey is director, retirement, at Cerulli. The company defines micro plans as those with less than $5 million in assets. Micro plans are usually associated with small businesses, he added. They have few employees; as a result, they usually have fewer assets in the plan. “A micro plan can also be a brand-new retirement plan that has not had very much time to accumulate assets. These can belong to small businesses or larger organizations,” he explained.

Factors driving the increase

As earlier stated, Cerulli expects that 92% of all 401(k) plans will be in the micro plan segment. What are some of the reasons for this expected increase? State mandates and tax incentives offered by SECURE 2.0 are two factors contributing to growth in this segment, explained Bailey. “More and more states are requiring businesses of a certain size to offer some form of retirement plan. As small businesses consider their options, we are seeing many choosing to start their own plan instead of adopting the program their state offers. It also helps that SECURE 2.0 provides meaningful tax incentives to encourage small businesses to set up a retirement plan,” he said.

Tapping into the micro 401(k) market

Advisors who wish to tap into this growing market can take a variety of steps. One place to start is at their home office, Bailey said. Their organization probably has training and resources to help these advisors get started, including resources that can help an advisor learn more about the 401(k) market, prospect for micro plans, and develop a pitch to the employer. If their home office does not have these resources, several recordkeepers and asset managers offer toolkits to help advisors learn about the retirement marketplace.

“Wealth advisors should also speak with their clients, especially those who own a business,” Bailey added. “Some may be responsible for a retirement plan and might need help managing the investments in their retirement plan, benchmarking fees, or establishing a new plan.”

What recordkeepers can do
The survey also said that recordkeepers who are 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,” added Bailey.

In addition, digital recordkeepers have established a competitive position in the micro and small-plan market. These providers bring a technological mindset to the retirement market, along with newer and more efficient recordkeeping platforms, the survey 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.

Wealth advisors expected to play a larger role
According to the survey, wealth advisors are also expected to play a larger role in the micro market, as their home offices encourage them to pursue retirement plans 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 who are 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,” said Bailey. “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.”

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