Retail banks are teaming up with record keepers to launch 401(k) plans for the small businesses they serve.
Huntington National Bank, for instance, rolled out a 401(k) plan this month for small employers that were looking for "the building blocks to get their plans up and running," said Frank Zugaro, head of Huntington Private Bank's retirement plan services business in Akron, Ohio. Huntington Private Bank is the wealth arm of Huntington National Bank.
The plan, known formally as the Huntington 401(k) Center for Business solution, provides small employers with a set investment menu made up of 18 options and flexible design features that let employers adjust things such as plan eligibility, matching formulas and non-elective contributions, Mr. Zugaro said.
The launch follows J.P. Morgan Chase & Co.'s introduction of a 401(k) plan for its small-business clients called Everyday 401(k), which rolled out in October 2020.
The two banks partnered with record keepers for their new offerings. Huntington paired up with PAi Retirement Services and J.P. Morgan Chase with SS&C Technologies Holdings Inc.
The launches come as banks report strong demand for 401(k) plans among their small-business clients. As the labor market tightens, more small businesses are looking to offer workplace retirement plans to compete for talent and keep workers from leaving. The government, too, has stoked interest in 401(k) plans by boosting the tax credit small businesses can claim for introducing retirement plans, according to bank executives.
With a more generous tax incentive, small businesses are now more inclined than ever to offer first-time 401(k) plans — and bank executives are taking note with offerings catered just for them.
Further spurring banks to offer 401(k) plans is an expectation that tax incentives will become even juicier.
"There's a significant amount of legislation working its way through Capitol Hill right now that has some pretty unprecedented incentives for every business — mostly focused on the small-business market — to sponsor a retirement plan," Huntington's Mr. Zugaro said.
In addition to wanting to take advantage of tax incentives, many of Huntington's more than 400,000 small-business clients are also driven by a desire to gain a recruiting edge. "Retaining and attracting employees is a high priority, especially in the current labor market," Mr. Zugaro said of small-business clients looking to launch retirement plans. "It's always better to have a plan than not when recruiting employees."
The bank's new offering is designed for companies with up to 50 employees and is well suited for employers that don't currently offer plans as well as those with small plans with $1.5 million to $2 million in assets, Mr. Zugaro said.
The plan's investment menu consists of 17 core investment funds plus a target-date fund series. The investments, which are "asset manager agnostic," use the lowest cost share-class possible, Mr. Zugaro said, explaining that they do not have 12b-1 fees or revenue sharing.
Huntington Private Bank serves as the plan's 3(38) investment manager.
Since its launch on Aug. 3, the Huntington 401(k) plan has drawn one employer. Mr. Zugaro declined to name the company.
J.P. Morgan Chase also launched its Everyday 401(k) to meet the demand from its more than 5 million small-business clients. "Small-business owner concerns around recruiting and retention were a factor in our launch of Everyday 401(k)," said Charlie Cote, managing director and head of retirement plan sales at J.P. Morgan Asset Management in New York. "They have grown as motivators for launching retirement plans over the last few years."
To date, Everyday 401(k) has attracted more than 1,300 employers, 90% of which had never offered a workplace retirement plan before.
"We are experiencing robust sales momentum with nearly 100 new plans being added per month," Mr. Cote said. He declined to say how much the plans currently have in combined assets.
Everyday 401(k) offers the bank's small-business clients three predesigned plan packages, including standardized safe harbor and non-safe-harbor plan offerings along with a "Flex Choice" option that gives employers the ability to customize plan design features, such as plan eligibility, employer contributions and vesting schedules.
The bank chose the "most common plan design types to make it easier for plan sponsors to set up a plan more quickly," Mr. Cote said.
The investment menu for Everyday 401(k) is the same for all three packages. It consists of mutual funds with J.P. Morgan and four outside managers, Mr. Cote said. Mesirow Financial Holdings Inc. serves as the 3(38) investment manager.
Everyday 401(k) is well suited for companies with up to 20 employees, Mr. Cote added.
Bank of America Corp., which launched a 401(k) plan for small businesses much earlier in 2012, also did so because many of its more than 3 million small-business clients were also asking for them, said Erin Donnelly, a managing director in the retirement and personal wealth solutions group at Bank of America in Pennington, N.J. The plan uses PAi as its record keeper and Morningstar Investment Management LLC as its 3(38) investment adviser.
Its Merrill Small Business 401(k) helped Bank of America broaden its suite of small-business retirement plan options, which included SIMPLE (Savings Incentive Match Plan for Employees) plans and SEP (Simplified Employee Pension) individual retirement accounts, she said.
Ms. Donnelly declined to disclose how many small employers use the Merrill Small Business 401(k) plan or how much it has in assets, saying the bank does not publicly disclose those numbers.
Bank executives are bullish on the growth of their 401(k) plan offerings given the strong client demand and the enhanced tax credit that went into effect with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019. They are also optimistic about a slew of additional incentives being considered as part of three legislative bills broadly referred to as SECURE 2.0.
The current tax credit that went into effect in December 2019 is available to employers with up to 100 employees for three years and is equal to 50% of their retirement plan costs, up to annual cap of $5,000. That's 10 times the previous cap of $500.
Other incentives are in the works. For example, under a provision in the Securing a Strong Retirement Act of 2022, which passed the House in March, the tax credit would get even sweeter for employers with 50 or fewer employees, the segment of the market least likely to offer retirement plans, according to industry experts. The legislation would cover 100% of their retirement plan startup costs, up to an annual cap of $5,000. In addition, they would receive an additional credit for contributions they make on behalf of each employee up to a cap of $1,000 for five years. The proposed credit would offset 100% of employer contributions for the first two years and then fall gradually to 75% in year three, 50% in year four and 25% in year five.
An employer that contributes $1,000 to each of its 20 employees, for example, would receive a $20,000 credit for the first two years, a $15,000 credit in the third year, a $10,000 credit in the fourth year, and a $5,000 credit in the fifth year.
The anticipated new credits, coupled with strong demand, has led bank executives to set ambitious growth objectives. Huntington's Mr. Zugaro is looking to add 100 to 200 plans a year for the next five years. J.P. Morgan's Mr. Cote, meanwhile, is aiming to become a leading 401(k) provider in the small-plan market under $5 million in the next 10 years.
The executives are optimistic about their growth prospects despite competition from record keepers, robo 401(k) providers and even pooled employer plans, which allow employers to pool their plan assets to gain better pricing.
"Depending on the size of the plan and some other factors, fees could be lower in a pooled employer plan construct, but not in every case," Bank of America's Ms. Donnelly said.
With their robust built-in base of small-business clients, the bank executives believe they have an important strategic advantage over their non-bank rivals.
"There's room for lots of solutions," J.P. Morgan's Mr. Cote said. "The small-plan marketplace has been underserved historically, so I think the emergence of newer competitors is a healthy thing."
