Fintech plan providers saw growth in ’22 on low fees, government mandates

Small business 401(k) and IRA plan providers say they’ve seen strong growth in 2022 as small to medium-sized businesses choose more affordable options and seek to meet government retirement benefits.

CEOs of fintech providers Vestwell, Ubiquity Retirement + Savings and Icon Savings Plan say customer growth has been strong, in some cases “record-breaking” in 2022, although none provided specific figures. They expect continued growth in 2023, but with mixed feelings about how so-called SECURE 2.0 provisions will deliver on intentions to increase the take-up of pension benefits from small to medium-sized businesses.

“We’ve had a phenomenal year, beating forecasts of where we thought we’d be, says Aaron Schumm, CEO and founder of Vestwell. “The current market has people struggling and struggling to find their footing. But it’s also about getting them back to the basics and the core of what we do as a business, which is retirement, education and savings.”

Vestwell, Ubiquity and Icon are part of a group of companies offering an alternative to major pension providers Fidelity Investments, Empower Retirement and Vanguard. While large recordkeepers also generally offer turnkey small business products, fintech firms such as Betterment, Guideline and Smart(k) offer lower fees, intuitive platforms and easier administration for plan sponsors.

Despite continued growth forecasts for their respective businesses, all three CEOs recently interviewed by PLANADVISER say there is a long way to go for broader plan uptake of small employers. According to the last US Bureau of Labor Statistics data, about 56% of private employers with 1 to 99 employees offer defined contribution or defined benefit plans, with participation rates of just 38% – and this figure drops for businesses with 1 to 49 employees to 52% availability and 36% participation

The lack of access to pension plans for both small businesses and gig workers has been both a federal and state issue political point for years, with the SECURE 2.0 legislation still in play set to pass this year, and a handful of states that currently have a mandate that employers offer IRAs, or with pending legislation.

Vestwell’s Schumm says this combination of business needs and politics has helped drive interest in the firm’s 401(k) and 403(b) offerings

“Vestwell expects to continue accelerated customer growth across the business in 2023 as government savings mandates are rolled out with employers and savers focusing on saving for the critical aspects of life – retirement, education and health care – in times of economic uncertainty,” says Schumm.

Vestwell has continued to invest in its customer experience, and last week announced changes to its archive platform designed to outperform larger legacy providers. The company said its upgrades include the ability to process payroll corrections in “real time.” It also highlighted that participants can receive requested withdrawals from their retirement savings in two business days, which Vestwell says is faster than the industry standard.

State-mandated pension schemes have been and will continue to be a growth driver, says Schumm. Vestwell is the retirement provider for states like Oregon, Connecticut and Maryland, among others, through the Vestwell State Savings business.

“The whole motivation of Vestwell is to get people to save and help the savings gap beyond what the industry has done to date,” says Schumm. “Government mandates are a big driver behind getting people to save regardless of the size of the business.”

Fourteen states have pension programs in place, and more than 30 are considering them, according to payroll provider ADP.

Across the business, Vestwell says it has about 25,000 customers, one million savers and $25 billion in assets.

No more filing cabinets

In the mid-to-late 1990s, Chad Parks was a financial advisor working with small businesses in areas including their employee 401(k) plans. What he found was an inefficient, confusing and cumbersome marketplace dominated by “offices full of filing cabinets.”

Parks, who is the founder and CEO of Ubiquity Retirement + Savings, began researching a market where he found that approximately 70% of small and medium-sized businesses did not offer a workplace retirement plan.

“I saw the potential of what the internet could do and thought there has to be a business solution here,” says Parks. “It was a problem that needed to be fixed.”

His solution was an affordable, easily accessible 401(k) for small businesses set up through a digital platform. The industry, and Parks’ operations, have evolved over the past two decades. This has included leaner and more accessible digital tools, unified employer plans, and federal and state policy developments.

Despite the progress, there are still “psychological” blocks for smaller employers to offer pension plans, says Parks. Chief among these includes thinking they can’t afford a 401(k) plan. Another is that it becomes too complex for them to drive. Finally, simple inertia is a factor as they focus on running their business.

Ubiquity’s model, Parks says, combats two of those misconceptions with plans starting at a flat fee as low as $90 a month and the plan obligations and fiduciary responsibilities handled by Ubiquity. The inertia issue, he says, is aided by both state mandates as well as some of the provisions of SECURE 2.0. This includes offering states tax incentives that would offset the cost of starting an employee pension plan for three years.

“I understand that SMEs are overwhelmed by regulation, he says. “You have to look at it from a political objective — it’s not meant to be punitive, it’s meant to be rewarding.”

However, not everyone agrees that this policy will be enough to move the needle. Laurie Rowley, CEO and co-founder of Icon Savings Plan, says the industry needs to go further to offer affordable, portable workplace retirement plans.

Beyond 401(k)

“I’m not super impressed with SECURE 2.0,” says Rowley. “I don’t think it’s going to change the calculus.”

Her reasoning is that tax incentives or other measures will not push employers beyond the complexities of a 401(k) or other ERISA-regulated plans that would need annual testing, auditing and safe harbor needs.

Unlike ERISA-defined contribution plans, Rowley says, Icon provides employers with an IRA for workers who have a W-2 or 1099. The employer signs up, provides access to the employee, and Icon onboards them from there to an IRA with built-in investment options and financial advice.

Rowley says her career in the retirement industry showed her the need to create a scalable, easy-to-implement plan that workers could carry with them throughout their careers. Icon’s growth has come from a combination of marketing, employer referrals and advisers and brokers who find the solution solves a need.

“They get about a 95% close rate with Icon, because it meets their customers’ needs,” says Rowley.

This need, she says, comes especially from a number of industries that historically have not benefited from workplace pension plans: health care, hospitality, retail and manufacturing, all of which also have a somewhat transient workforce. The Icon IRA is tied to the participant and is therefore fully portable, with the option for a saver to take it with them to their next job without making any changes to their investments or setup—just a rollover to their next employer’s payroll, Rowley says.

She sees this portability as a huge development in keeping “about $100 billion from leaving the system” due to withdrawals.

“There’s so much friction rolling in and rolling out,” says Rowley. “We have the technology now for an employee to carry their savings throughout their career.”

Cracking eggs

Parks of Ubiquity says one area to look for differentiation among digital providers is customer service. Technology and automation may come a long way, but his firm still has an 800 number to call and speak to a customer representative.

“You have to deliver a solution that has a good user interface and is also supported by support,” says Parks. “We’re seeing a greater use of services that are half-robotic and half-real … people are getting used to that kind of service.”

While technology has advanced, many of the retirement savings problems in America still remain, Parks says. He notes a documentary Ubiquity made back in 2014 called “Broken Eggs: The Looming Retirement Crisis in America.” A review of the statistics in that documentary is unfortunately still very similar today, he says.

Still, Parks is optimistic that the coming year will bring continued opportunities.

“Saving for your future is a fundamental thing that needs to happen in good times and bad,” says Parks. – We have to keep up the pace.