The cannabis industry has long operated on the fringe of mainstream business, and recent developments regarding 401(k) plans underscore the ongoing struggles in this sector.
In the summer of 2024, several custodial vendors discontinued services for cannabis companies due to regulatory uncertainty, issuing widespread termination notices for company-sponsored 401(k) plans. This shake-up emphasized the need for retirement solutions tailored to the industry’s unique challenges. Specialized plans are emerging to fill the gap, giving cannabis employers more viable options. Nevertheless, businesses must stay proactive and adaptable as financial service offerings continue to shift.
Termination notices from custodial vendors can come as a shock to many employers, particularly given the significant strides cannabis businesses have made toward compliance and legitimacy. With little advance notice in 2024, employers faced — and some continue to face — the daunting task of finding alternative 401(k) providers willing to serve their unique needs in a tight timeframe.
The consequences of failing to act promptly could be significant. Employees could lose access to the retirement savings infrastructure they depend on, and employers might risk damaging employee morale and trust. Furthermore, businesses could face regulatory complications if funds are not handled according to the legal standards set by the Internal Revenue Service and Department of Labor.
The exit of 401(k) providers from the cannabis space stems from several factors. The plant’s federal illegality makes financial service providers, especially those operating across state lines, wary of regulatory risks. Inconsistent banking laws further complicate matters, creating operational and reputational challenges. While the Secure and Fair Enforcement Regulation (SAFER) Banking Act — a bill designed to protect financial institutions serving state-legal cannabis businesses and address social equity concerns — passed the Senate Banking Committee in 2023, its fate in the full Senate remains uncertain. Without clear federal guidelines, providers fear penalties or disruptions, limiting financial service options for businesses.
The small market size also affects viability. As of January 2024, the legal cannabis industry employed more than 440,000 workers, but only 30,000 (about 6.8 percent) participated in retirement plans. By comparison, 52 percent of private-sector workers in the United States had employer-sponsored plans in 2022. Cannabis companies struggle to offer 401(k)s due to regulatory hurdles, limited providers, and low employee participation.
How Cannabis Employers Can Respond
Despite these challenges, employers can take the following proactive measures to protect their 401(k) plans and ensure continuity of services for their employees.
Engage with alternative providers
The first step is to identify financial service providers willing to work within the cannabis sector. Work with a broker to identify these vendors and consider networking with industry groups, trade organizations, or specialized financial advisors who have experience navigating the complexities of cannabis-related finance.
Educate employees about 401(k) benefits
Given the low participation rates in the industry, it’s essential to educate employees about the value of 401(k) plans and retirement savings. Providing workshops, informational sessions, or one-on-one consultations can help employees understand how these plans benefit their long-term financial security.
Communicate with employees
Transparency is critical during transitions. Employers should communicate the changes to employees, outlining the steps they are taking to secure employees’ retirement savings and minimize disruptions.
Leverage industry advocacy
Businesses should advocate collectively for policy changes that expand access to financial services. This includes supporting legislative efforts that provide clarity and protection for financial institutions serving the cannabis sector.
Ensure compliance
Employers must ensure any transfer of funds complies with federal and state regulatory mandates, including those related to fiduciary responsibilities and reporting requirements.
The bottom line
The disruption in 401(k) plans highlights the need for broader financial reform. Although the industry is growing and maturing, its legitimacy remains hampered by limited access to essential financial services. Policymakers, financial institutions, and businesses must collaborate to create a sustainable infrastructure that ensures the industry’s long-term viability.
For now, employers must act swiftly to navigate the shifting 401(k) landscape. The road ahead may be challenging, but it offers an opportunity for the industry to show resilience and innovation in the face of adversity.
Dennis Bielik is an executive vice president and managing director at global insurance brokerage HUB International, Dennis Bielik, CFP®, CFA, FRM®, oversees operations at HUB Investment Partners, where he works to nurture relationships with clients, participants, outside vendors, and financial representatives. His goal is to help clients outperform their retirement goals.
