Are Small Business 401k Barriers (Finally) Breaking Down?

Only 14 percent of small businesses in the United States offer a retirement plan, according to the GAO. With almost 30 million small businesses in the United States, there is a huge gap in the market for employers and employees of small businesses.

Historically, this gap was due to the fact that small businesses were unable to or uninterested in offering retirement plans as an employee benefit, given the starkly different economics and operations of a small business vs. a large corporation.

However, given recent trends in affordability, technological innovation, competition for recruiting talent and even shifting attitudes towards retirement, 401ks are becoming a much more realistic option, both for the small businesses who are in need and the financial institutions who provide these plans.

Historical Barriers to Entry for Small Plans

Why have small businesses not been offering retirement plans to their employees? Here are the key barriers they have come across:

1. Lack of offerings: Because of the relatively small employee count and lack of predicted assets that would go into a small business 401k plan, most large financial institutions and advisors were not interested in servicing this segment of the market.
2. High fees: In order to make these small plans worthwhile to market to and service, administrative fees would be charged that would be well out of a typical small business owner’s budget (as much as a few thousand dollars a month). Advisory and asset-based fees would also be extremely high for employees in the plan.
3. High administrative burden and compliance risk: Without a full-fledged HR team (payroll specialist, benefits specialist, etc.) things like 401k plan design, reconciliation with payroll and compliance monitoring would fall on the business owner. Additionally, with a small employee count, small plans are more at risk of having a few outliers skew the ratios used for annual IRS non-discrimination testing and are more likely to fail, especially without regular, expert monitoring.
4. Lack of employee interest: With relatively lower salaries and no on-staff HR to coach them through the management of their 401k accounts, employees at small companies were less interested in or unable to afford consistent contributions into a 401k plan.

Nowadays, we have seen trends and developments in technology that are removing the barriers to 401ks, giving all businesses, regardless of their size, the ability to offer a modern and accessible 401k plan to their employees.

401k Startups and Added Services

Historically, large financial institutions have entirely owned the 401k market and were mostly interested in creating products and services geared towards large companies (with in-house resources able to handle maintenance and setup) because they were more profitable to work with.

However, in recent years, technology has made retirement planning easier than ever before. 401k startups and even large financial institutions have created new 401k products services to suit small businesses and cater to their specific needs. Everything that touches 401ks — payroll, compliance, employee management and more — needs to be adjusted to suit the reality of small business operations and budgets. These recent tech developments reduce a lot of the tedious administrative work around starting a 401k, making 401k planning more friendly and approachable for small business owners.

Lower Fees

For a while, 401k fees had been getting increasingly exorbitant for both employers and employees, and the public took notice. A marked increase in complaints and lawsuits fighting excessive fees were filed, increasing public awareness of 401k fees and causing providers to adjust their pricing.

On all fronts, 401k fees are decreasing due to consumer demand for greater transparency and accountability. With more affordable options on the market, small business owners are now able to fit the expense of implementing a 401k into their budget more easily. Employees can also feel more confident that their savings aren’t being depleted by fees.

Low Unemployment

With the lowest unemployment rate since 2000, employers are competing fiercely for talent and reacting with increased wages and a renewed focus on employee retention. Small businesses often can’t compete with corporations when it comes to big salaries and bonuses and are looking for creative ways to recruit candidates and keep current employees happy. Luckily, the demand is there: many employees would prefer a retirement benefit over a salary increase.

Retirement plans are a low-cost way to provide “big company” benefits at a small company, particularly for folks who may not have any other investment vehicles. Other benefits, like flexible work schedules and vacation policies, are also on the rise, as companies make an effort to address employee concerns around work-life balance, financial security and overall well-being.

Increased Interest in Retirement Saving

As American companies shift away from the pension system and faith in Social Security dwindles, the responsibility for retirement savings is falling on the shoulders of individuals. Both Millennials and Boomers are expressing interest in learning about their retirement options and planning ahead. Personal finance websites and online tools are everywhere, helping people calculate how much they’ll need to retire comfortably and how to adjust their saving habits today.

401k participation at small businesses is “surging,” according to Vanguard, so employers’ concerns about employee reluctance is no longer a determining factor in whether setting up and maintaining a 401k is worth it.

With employees making a point to ask about these types of benefits, small businesses are now reevaluating what they had previously thought of as an impossible option. The 401k landscape in 2018 is starkly different from that of 5 years ago, and certainly from that of 20 years ago! Small businesses are demanding more, and rightfully so — it’s only fair that this huge segment of the American economy should have access to a secure retirement.