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. 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. 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 92% of all 401(k) plans will be in the micro plan segment, representing a nearly 40% increase in micro plans from 2022.

Recordkeepers 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,” says Chris Bailey, Director, Retirement.

Digital recordkeepers have also established a competitive position in the micro and small plan market. These providers bring a technology mindset to the retirement market along with newer, more efficient recordkeeping platforms. 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 are also expected to play a larger role in the micro market, as their home offices encourage them to pursue retirement plans as a means 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 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,” says 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,” he adds.

Looking ahead, the distribution and competitive dynamics of the micro market will shift notably in the next five to 10 years. “Recordkeepers looking to compete in the micro market should consider investing in small business data sets to identify, prioritize, and market to employers that do not have a retirement plan, if they aren’t already,” says Bailey. “This data can also be used to power prospecting tools for advisors—investing in support for wealth advisors looking to enter the defined contribution space will help make a recordkeeper an advisor’s 'go-to' for micro plans,” he concludes.