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Help grow your wealth management practice using 401(k) start-up plans

06/27/2024

There’s a unique opportunity in the retirement marketplace for financial professionals looking to build deeper relationships and grow their wealth management practice. The prospect? Retirement start-up plans for small to medium-sized businesses (SMBs).

With the convergence of economic growth, tax incentives for small bu sinesses*, and new SMB products, the time might never be better to introduce 401(k) plans. In fact, Cerulli & Associates recently reported that the 401(k) marketplace is set to grow to 1 million plans by the end of the decade.1

By taking advantage of this evolution, financial professionals may be able to tap into a growing business segment and create a new pipeline of retirement plan participants for their wealth management services.

The business strategy for retirement startup plans

Many wealth management clients are likely small business owners. Expand on these relationships to potentially turn them into business prospects for start-up retirement plans. As a service provider, be accessible to offer additional services to the plan participants as prospective wealth management clients.

The opportunity: SMBs are primed to hire and add retirement benefits

This is where change is happening. Optimism is high amongst SMBs about the overall economic outlook with 80% expecting their business financials to improve within the next year.2 Recruitment and retention are top of mind as many say they’re looking to grow their full-time staff, and 94% say a top business issue is employee retention. 3,4 Consequently, SMBs realize the benefits package must be competitive and that typically means adding retirement benefits—79% say they want to add more benefits within the year.5

Less than half (48%) of small businesses with less than 50 employees currently don’t provide a retirement plan, but it’s the most requested benefit from employees. 6,7 This provides ample opportunity for financial professionals to help address this top concern.

Creating value: Start-up plans become more cost-effective

Small businesses have been less likely to offer a retirement plan to their workers because of cost.8 But tax incentives in SECURE 2.0 are now available to help make it more affordable.9

There are two tax credits available for small businesses with 50 or fewer employees:

  1. A tax credit for plan start-up costs, which may be able to offset most costs related to their new retirement plan for the first three years.*
  2. An additional tax credit for start-up plans that also offer employer contributions.

Nearly 60% of small businesses are unaware of these tax incentives.10

This information could be what persuades small businesses to start a retirement plan for their employees. To help get the word out, financial professionals can find educational resources and tools about the SECURE 2.0 tax incentives and how they work. Along with information on how the incentives work, this resource can also help calculate how much their start-up tax credits might be, providing more incentive for them to start a plan.

Simplifying the experience: new products designed for SMBs

Some SMBs feel their business is too small to have a retirement plan. However, that’s not the case. Retirement plan service providers are keenly aware of the economic and legislative changes creating new opportunities within small businesses. They’re focused on building new retirement plan products with SMBs and their employees in mind. The goal is to provide plans for both the financial professional and the client that are easier to set up and less complicated to administer. Financial professionals can find these dedicated SMB plans from many retirement plan providers.

Learn more about 401(k) startup plans

For financial professionals looking for a new way to grow and expand their business, now might be the time to capitalize on what’s happening around retirement start-up plans. Turn your current wealth management contacts into warm business prospects. As the business side grows, deepen the relationship with the retirement plan participants with additional wealth management services.

Discover more about the small business marketplace and how financial professionals can help employers navigate the retirement start-up plan environment.

* SECURE Act 2.0 legislation allows small businesses with up to 50 employees a tax credit of 100% and those with 51-100 a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan for the first three years of the plan as follows but limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000.

* SECURE Act 2.0 legislation allows small businesses with up to 50 employees a tax credit of 100% and those with 51-100 a tax credit of 50% of the qualifying start-up costs for a new employee retirement plan for the first three years of the plan as follows but limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each non-highly compensated employee who is eligible to participate in the plan or (b) $5,000.

1 Cerulli, U.S. Retirement Markets report, December 2023.
2 Principal Financial Well-Being IndexSM 2024 Wave 1.
3 Principal Financial Well-Being IndexSM 2024 Wave 1.
4 2024 Principal SMB Sentiment Survey Sprint 1.
5 2024 Principal SMB Sentiment Survey Sprint 1.
6 Small business retirement plans: How firms perceive benefits & costs, Center for Retirement Research at Boston College, March 26, 2024.
7 2024 Principal SMB Sentiment Survey Sprint 1.
8 2024 Principal SMB Sentiment Survey Sprint 1.
9 SECURE Act and SECURE 2.0 Act of 2022.
10 Principal Financial Well-Being IndexSM 2023 Wave 1

New tax credit for start-up plans offering employer contributions: A tax credit equal to the applicable percentage of employer contributions, capped at a maximum of $1,000 per employee.

Applicable to small employers with 50 or fewer employees.

For employees with 51-100 employees: The credit is phased out by reducing the amount of credit each year 2% for each employee in excess of 50.

Applicable Percentage:

1st and 2nd year = 100%, 3rd year = 75%, 4th year = 50%, 5th year = 25%, 6th year = 0%

No contributions may be counted for employees with wages in excess of $100,000 (inflation adjusted). If taking advantage of this tax credit, employer contributions may not also be counted towards “start-up costs” in the start-up tax credit calculation.

Important Information

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, a member of the Principal Financial Group®, Des Moines, IA 50392.

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