Tech-Forward Recordkeepers Enter the Micro 401(k) Market

June 28, 2021 — Boston

New tech-forward recordkeepers offering low-cost, easy-to-onboard startup plans for small businesses are penetrating the micro 401(k) provider market, according to the latest Cerulli Edge—U.S. Retirement Edition. As more providers vie for marketshare, Cerulli expects competition within the micro market will intensify.

Retirement plan recordkeeping is widely viewed as a low-margin business, particularly within the micro plan market, but providers can use recordkeeping as a platform through which to distribute more lucrative investment products and services, including proprietary mutual funds. According to the research, more than 40% of micro 401(k) plan assets are invested in proprietary investment products.

While many traditional micro market providers are asset managers or insurers first and foremost, several of the newer, tech-forward recordkeepers operating in the micro 401(k) market are pure-play recordkeepers without an asset management or insurance arm. These providers offer unbundled solutions, mainly featuring low-cost index funds from third-party asset managers, although some offer custom portfolio allocation services through their recordkeeping platforms—a potentially lucrative ancillary revenue source. Several of these newer, tech-forward entrants have experienced success with startup plans by distributing their solutions directly to plan sponsors via digital self-onboarding portals, yet larger plan asset segments within 401(k) market remain highly intermediated.

As small businesses mature and their 401(k) plan headcount and assets increase, their retirement plan needs will likely evolve, and many will turn to an advisor for help. Further, Cerulli research finds advisors are generally perceived as the key decision-makers in the micro 401(k) market. Therefore, fostering strong advisor relations remains critical to winning business outside the startup plan space. “As a plan matures, the plan sponsor will often turn to an advisor to help them create a more robust retirement plan for their employees. This might include incorporating strategic plan design changes, implementing a financial wellness program, or constructing an open-architecture investment lineup,” says Shawn O’Brien, senior analyst.

Payroll integration is another key area of focus for recordkeepers, advisors, and plan sponsors in the smaller end of the market. For micro 401(k) plan sponsors, which often often lack the human and financial resources of larger plan sponsors, transmitting and reconciling participant-level data (e.g., deferral rate changes) between their payroll provider and recordkeeper can be a cumbersome undertaking. As such, recordkeepers in this space have established strategic partnerships with payroll providers to automate and streamline the payroll integration process. “Ideally, recordkeepers want to establish 360-degree payroll integration arrangements, in which participant information is automatically transmitted back and forth between the recordkeeper and payroll provider,” notes O’Brien. “But in a lot of cases, it’s 180-degree integration where information is only being transmitted from payroll to the recordkeeper, but not the other way around.”

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Note to editors

These findings and more are from The Cerulli Edge—U.S. Retirement Edition, 2Q 2021 Issue.

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