Small businesses added retirement plans at a 64% faster clip from 2019 to 2026, reshaping the defined contribution market and raising questions about who will serve the micro-plan boom.
Small businesses added retirement plans at a 64% faster clip from 2019 to 2026, according to Gusto senior economist Nich Tremper, who analyzed payroll data from organizations with two to 99 employees. The surge is reshaping a market that Cerulli Associates projects will see 92% of all defined contribution plans in the micro segment by 2029, with total plans exceeding one million by 2030.
Just 19% of small businesses offered a retirement plan in 2019. That figure hit 31% in 2026. Hourly worker participation climbed to 38% from 22% seven years ago, though it still trails the 73% rate for salaried employees. Tremper said the growth is not entirely driven by government mandates. States with mandates saw a dramatic acceleration, he noted.
The question is who will sell and service these plans. Fred Barstein, founder of The Retirement Adviser University, said in a recent analysis that the current group of roughly 10,000 retirement plan advisors is unlikely to pursue the micro market. Fees are low, work is high, and liability is significant. Pooled employer plans require separate sales efforts. Cross-selling by benefit brokers has produced mixed results.
Wealth advisors show more interest. About 275,000 of them are looking at defined contribution plans as a way to gain new financial planning clients and deepen existing relationships, Barstein wrote. Fees and profit margins are higher in wealth services. With more than 35% of financial advisors expected to retire over the next decade, many are not eager to learn a new line of business, he added.
Larger asset managers have extensive wealth-wholesaling forces. None have solved the incentive problem. Data issues make it hard to compensate wholesalers for including DC plans in their pitches. Some firms have simply decided not to try, Barstein said.
Payroll providers and fintechs have captured the early gains. ADP, Paychex and Gusto mostly cross-sell plans. Fintechs such as Vestwell, Human Interest, Betterment and 401Go partner with payroll companies to reach small businesses. Human Interest is significantly increasing its sales force, according to Barstein.
Technology remains a bottleneck. Ted Benna, often called the father of the 401(k), said the current structure is too complicated. Record-keeping systems have struggled to handle the volume of small plans efficiently. FIS recently launched cloud-based versions of its Relius and Omni platforms, incorporating more than 100 third-party applications, the company said.
Barstein drew on Clayton Christensen's "Innovator's Dilemma" to frame the challenge: incumbents with successful business models rarely pivot to lower-margin, higher-volume markets. The opportunity is large – 42 million people participate in the gig economy, with one in ten relying on it as primary income. The current alignment of advisors, providers and asset managers is off, Barstein said.
ADP, with an Alpha Score of 61 out of 100, sits in the moderate range on AlphaScala's proprietary measure. FIS, at 39, falls in the mixed category. Both face the same structural question: whether the retirement-plan boom for small businesses becomes a new growth engine or remains a niche served mainly by fintechs.
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