Banks offer 401(k) plans for their small business customers

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 customers also requested them, said Erin Donnelly, managing director in the retirement and personal wealth solutions group at Bank of America in Pennington, New Jersey. The Plan uses PAi as its filer and Morningstar Investment Management LLC as its 3(38) investment adviser.

His Merrill Small Business 401(k) helped Bank of America expand its range of small business retirement plan options to include SIMPLE (Employee Savings Incentive Plan) 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 many assets it has, saying the bank does not make those numbers public.

Bank executives are optimistic about growth in their 401(k) plan offerings, given strong customer demand and the increased tax credit that went into effect with the passage of the Secure Every Community Act ) in December 2019. They are also bullish about a number of additional incentives being considered as part of three legislative bills widely referred to as SECURE 2.0.

The current tax credit, which took effect in December 2019, is available to employers with up to 100 employees for three years and equals 50% of their pension plan costs, up to an annual limit of $5,000. This is 10 times the previous cap of $500.

Other incentives are in the works. For example, under a provision in the Strong Retirement Security Act of 2022 that passed the House in March, the tax credit would get even sweeter for employers with 50 or fewer employees, the segment of the market that is most likely to offer pension plans, according to industry experts. The legislation would cover 100% of the start-up costs of their retirement plan up to an annual cap of $5,000. In addition, they will receive an additional credit for contributions they make on behalf of each employee up to a cap of $1,000 over five years. The proposed credit will offset 100% of the employer’s contributions for the first two years and then gradually decline to 75% in the third year, 50% in the fourth year and 25% in the fifth year.

An employer who contributes $1,000 to each of its 20 employees, for example, would receive a $20,000 credit in 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.

Anticipated new loans combined with strong demand have led bank executives to set ambitious growth targets. Mr. Zugaro of Huntington aims to add 100 to 200 plans a year over the next five years. JP Morgan’s Mr. Cote, meanwhile, aims to become the leading 401(k) provider in the small plan market under $5 million over the next 10 years.

Executives are optimistic about their growth prospects despite competition from filers, robo 401(k) providers and even employer pooled plans that allow employers to pool their plan assets to get better rates.

“Depending on the size of the plan and some other factors, fees may be lower in a pooled employer plan structure, but not in every case,” Bank of America’s Ms. Donnelly said.

With their well-established base of small business customers, bank executives believe they have an important strategic advantage over their non-bank competitors.

“There is room for many solutions,” said Mr. Cote of JP Morgan. “The small plan market has been underserved historically, so I think the emergence of newer competitors is a healthy thing.”

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