Unlocking the treasure chest: The growing opportunity of 401(k) plans for wealth advisors

In the ever-evolving landscape of financial services, wealth advisors are always seeking new avenues for growth and client engagement. One promising area they may consider is the 401(k) market. With the rapid expansion of 401(k) plan formation, advisors who pivot toward this sector can unlock significant business development potential.

By the numbers: The growth of 401(k) plans

The 401(k) market has seen remarkable growth over the past decade. As of the first quarter of 2024, Americans had $7.8 trillion invested in 401(k) plans.¹ This growth is not just in assets but also in the number of plans and participants. For example, the number of 401(k) plans has increased significantly, with 55.8% of plans having less than $1 million in assets, and 48.8% of all 401(k) assets concentrated in plans with more than $1 billion in assets.

Moreover, participation rates are encouraging. In 2019, 43% of all workers participated in a defined contribution plan such as a 401(k). This participation is even higher among workers with automatic enrollment, reaching up to 89% for those earning between $30,000 and $49,999.²

The metaphor: Mining for gold in the 401(k) market

Imagine the 401(k) market as a vast gold mine. The surface has been scratched, but the richest veins of opportunity lie deeper, waiting to be discovered. Wealth advisors are like skilled miners, equipped with the tools and expertise to unearth these additional revenue opportunities. By tapping into the 401(k) market, advisors can not only diversify their service offerings but also build long-term relationships with clients looking for comprehensive retirement planning solutions.

Why pursue the 401(k) market?

The 401(k) market may offer wealth advisors a compelling avenue for growth and client engagement. With increasing demand driven by legislative changes and a heightened focus on retirement planning, advisors have a unique opportunity to expand their services. Specializing in 401(k) plans can diversify revenue streams, enhance client loyalty and help advisors stand out in a competitive market. To effectively tap into this market, advisors should consider several key factors.

1. Growing demand: As more companies offer 401(k) plans, the demand for expert advice on plan design, management and optimization is increasing. State auto-IRA mandates and the SECURE Acts of 2019 and 2022 are helping to fuel this demand.
2. Client retention: Offering 401(k) advisory services can enhance client loyalty by providing a holistic approach to financial planning. Most IRA rollovers go to an advisor the worker knew prior to the rollover triggering event.
3. Revenue streams: Advisors can generate additional revenue through plan management, participant education programs and investment advisory services. One of the most popular participant education opportunities is financial wellness consulting. Financial wellness engagement can help advisors identify and consolidate retirement assets from prior employment. Many individuals accumulate multiple 401(k) accounts due to frequent job changes. According to the Bureau of Labor Statistics, the average American holds 12 jobs over their lifetime, often resulting in stranded retirement assets.³
4. Market Differentiation: Specializing in 401(k) plans can set advisors apart from competitors who may not offer these services. Approximately 35% of wealth advisors’ clients in the United States are small business owners. Concentrating some time on 401(k) plans may give advisers an advantage when mining for small/medium business- owner clients .⁴
    

Consider potential growth

To estimate the asset growth potential of a $1 million 401(k) plan over the next 10 years, there are several factors to consider, including annual contributions, employer match and expected rate of return.

Assumptions:

• Annual contributions: Assume the company contributes 5% of its $2 million payroll annually to the 401(k) plan.
• Employer match: Assume an employer match of 50% up to 6% of employee contributions.
• Rate of return: A conservative average annual return of 7%.

Annual contributions calculated:

• Employee contributions: 6% of $2 million = $120,000
• Employer match: 50% of $120,000 = $60,000
• Total annual contributions: $120,000 + $60,000 = $180,000
   

Consistent contributions drive the outcome

Under these assumptions, the 401(k) plan could grow to approximately $4.45 million over 10 years. This demonstrates the significant growth potential of a well-managed 401(k) plan, that features consistent contributions and a reasonable rate of return.