The Small Plan Market

Small Business Needs Big Products

Price is always important, but flexibility is often just as critical

by Tim Seifert

Mr. Seifert is the vice president, national sales manager of Lincoln Financial’s Intermediary Retirement Plan Services business.

These are promising times for financial advisors and plan administrators focusing on the small business market.
The Small Business Administration recently released 2014 data that documents the contribution of small business to the U.S. economy and demonstrates the size of the opportunity for the defined contribution market.

Small business represents:

  • 99.7 percent of U.S. employer firms
  • 63 percent of net new private-sector jobs
  • 48.5 percent of private-sector employment
  • 42 percent of private-sector payroll
  • 37 percent of high-tech employment

As these companies grow and the employment picture continues to improve, small businesses need to find ways to reward good employees and maintain a stable, growing workforce. Benefits that help employees prepare for their retirement are valuable to compensation structures.

With only about 23 percent of small businesses sponsoring defined contributions plans1, that means there’s plenty of opportunity to start new conversations and build client relationships with top decision-makers at businesses all over the country.

In one respect, marketing to small businesses is easy as many small business owners have corporate experience. They know and appreciate the value of defined contribution plans. But it’s also challenging because many of the products in the marketplace are designed around the notion that small businesses need small products.

This can be a disservice to successful small business owners. On the contrary, the unique characteristics of the small business market for defined contribution products and services means small business owners need bigger products that can be customized to fit their unique and dynamic needs.

Small Business Does Not Mean Small Price

Why the traditional focus on smaller, abbreviated products for small business? Part of the answer may lie in the belief that price is the primary or most determining variable influencing decision-making.

Price is important, of course, but not as important as flexibility. In fact, in addition to price, flexibility trumped access to advice, product/service utility, relationship with the representative and the amount of effort required to purchase a sponsored plan. All these were less important than flexibility2.

In fact, research focusing on the attitudes of small business owners points to flexibility as being the dominant factor in their choice. Research on advisor attitudes goes in the opposite direction; however, showing price is critical3.

This inconsistency in attitudes suggests that it could be that advisors are competing on price when they should be focused on more relevant priorities. Clearly, there are several psychological and personality traits among small business owners that advisors and administrators should appreciate and can be applied to start a conversation. For instance, common considerations among small business owners are concern for the well being of their employees, risk aversion, and continuous changes in the business landscape and their businesses2.

And of course business owners are keenly aware of the positive impact participation in executed retirement plans have on employee retention. Among small businesses, the costs of turnover are disproportionally high. An employee leaving a $10 billion-plus company is negligible. Losing an employee for a company with perhaps just 20 others could mean losing an entire department.

Small Business Owners Are Loyal, To a Point

Half of all small business owners make financial services purchases from more than one provider4.

This is both a positive and a negative. It means advisors and administrators have the promise of capturing all or a significant portion of a client’s financial services business. But it also means that about half the time, advisors are unable to capitalize on valuable cross-selling opportunities where margins may be significantly higher.

This finding suggests that larger, more robust products may deliver advisor and administrator opportunities to open or deepen a relationship with a small business client. Why? Because defined contribution offerings with breadth and scope give advisors and administrators the muscle they need to deliver flexibility and strengthen their relationships, thereby short circuiting the tendency for small business owners to look elsewhere for products and services.

One Size Does Not Fit All

marketing to small businesses is easy as many small business owners have corporate experience. They know and appreciate the value of defined contribution plans

One of the hallmarks of the small business market is a lack of uniformity.

Ownership structures, management, leadership, needs for financial services, and, of course, size are all different for each business. As a result, the experience for advisors and administrators is that one size doesn’t seem to fit any.

This may explain why market penetration for defined contribution plans among small business, at just 23 percent, are low with respect to market potential. Further, this level of market penetration for defined contribution was reached after six years of minimal growth as indicated by LIMRA research about financial product ownership trends among small business owners5.

There are a variety of factors influencing this trend, and playing prominently among them are the lingering effects of the financial crisis during 2008 and 2009. Nearly everyone lost money, and many lost faith. But with the crisis now six years into the past, the clamor about the importance of planning for retirement loud, the small business market is a ripe opportunity for advisors and administrators who want to grow their businesses.

After all, with only 23 percent penetration for defined contribution products in the small business market, 77 percent of the market remains wide open. But a large numerical opportunity does not eliminate all obstacles. Capturing the next stage of growth within the small business market means knowing how to ably navigate the challenges posed by the lack of uniformity in the market.

Getting To The Next Level

Perhaps, the intricacies involved in marketing small business defined contribution services have resulted in a split among advisors who participate. About half of advisors in the market manage less than $10 million in assets and about 40 percent manage more than $10 million6.

The percentage of advisors with portfolios of less than $10 million is, of course influenced by those just entering the market. However, large segments of this population also may have a degree of ambivalence toward the small business segment that obscures its potential in their eyes. In industry parlance, they may be simply “dabbling” without a strategy to capitalize on an under appreciated and underserved market.

From our perspective, this ambivalence may be driven, in part, by inadequate products with which to target the market. This conjecture goes beyond mere speculation. Defined contribution specialists with assets of between $10 million and $25 million are all upping their game.

Specifically, advisors in this cohort have increased their commitment to the following areas as part of their service offering according to the same Cogent Wealth report:

  • One-on-one advice regarding plan investment options
  • Helping retiring or terminated participants with rollover/distribution options
  • Long-term financial and retirement planning
  • Investment strategies to generate retirement income
  • Offering/assisting with managed accounts

Perhaps advisors are inherently moved to increase their service and commitment levels in the small business market. But we think it’s dictated by the market and that larger, open architecture products with a wider array of investments and fund families are enabling them to provide the service levels that lead to success in the small business market.

Alignment, Finally

Perhaps now more than ever, the defined contribution product landscape is better aligned with the unique needs of the small businesses. That’s one reason why advisors and administrators looking to grow their business should be focusing on this segment of the market. Another reason is these businesses are the driver of jobs and growth in America and the number of new businesses in formation in the U.S. is at the highest levels so far this century.

However, advisors and administrators motivated by this opportunity need to move quickly. Small business owners make 70 percent of their purchases for defined contribution plans within their first six months in business. ◊



1. LIMRA, Sizing Up Small Business Owners: Product Ownership Trends, 2015
2. LIMRA, Sizing Up Small Business Owners: Product Ownership Trends, 2015
3. CEB, Small Business Purchasing: How Owners Buy Core Business Services, May 2015
4. CEB, Small Business Purchasing: How Owners Buy Core Business Services, May 2015
5. LIMRA, Sizing Up Small Business Owners: Product Ownership Trends, 2015
6. Cogent Wealth Reports (Retirement Plan Advisor TrendsTM), September 2014