Small businesses are an essential part of the American economy. They spark innovation, drive competition and employ many people.
In fact, from 1998 through 2014, small companies accounted for two-thirds of new jobs created in the United States and almost half of all the goods and services produced.
Here’s the rub: Many small businesses do not sponsor retirement plans. It’s a serious issue.
This is so even though small businesses employ almost half of working Americans, and workplace retirement plans are the second most important source of retirement income after Social Security.
Why don’t small businesses sponsor retirement plans?
Millennium Trust wanted to examine why small businesses do not sponsor retirement plans, and last year the 2018 Millennium Trust Small Business Retirement Survey exclusively interviewed small businesses without retirement plans.
Company owners who participated in the survey agreed Americans will not have enough money saved for retirement.
Many believed employees would save more for retirement if they had access to workplace plans, but that hasn’t inspired them to offer one.
Their reluctance may be overcome by addressing perceptions and obstacles that have impeded plan adoption. As indicated in our survey results, these include owners’:
- Limited awareness of retirement plan options: Only 23% of employers surveyed had researched plans other than 401(k) plans, and 45% had not researched any options at all.
- Perception that plan costs are too expensive: It won’t come as a surprise that most employers would prefer a no-cost plan. That said, a significant proportion of employers indicated a willingness to spend limited amounts on retirement plans.
Thirty-three percent of employers were willing to pay $20 per employee annually, 29% were willing to pay $50 per employee and another 14% were willing to pay up to $60.
- Uncertainty about the importance of plans to employees: While owners said they would be willing to sponsor a plan if it allowed them to save for retirement, many were unsure whether plan access was important to their employees.
The survey also interviewed employees. A majority said access to a retirement plan was important when choosing a new employer (88%) and was a key consideration when deciding whether to stay with an employer (83%).
- Belief that their companies are too small to offer retirement plans: Almost two-thirds said their companies were too small to offer retirement savings solutions, which is likely based on the belief that 401(k) is the only available option.
Don’t assume small business owners understand all of the options available
There is a clear need to educate smaller employers about retirement plans. Many do not understand that affordable options designed specifically for small businesses are available in the marketplace. By adopting a plan, an employer may improve its ability to attract and retain top talent, while also improving retirement security in America.
When a 401(k) isn’t the right fit due to size or cost, remember there are other options. These include:
- Multiple and pooled employer plans (MEPs and PEPs)
- Simplified Employee Pension (SEP) IRAs
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- Payroll deducted IRAs
Small businesses are the front line of the retirement crisis. Helping them meet the challenge will require a retirement system that offers diverse plan options and maximizes the likelihood every employer finds a plan suited to its needs.
NOTE: The 2018 Millennium Trust Small Business Retirement Survey was conducted among 500 decision-makers at companies with less than 150 employees that do not offer any type of retirement savings option, and 500 employees who are working full-time at employers with no retirement savings option between September 28-October 8, 2018. The survey was commissioned by Millennium Trust Company and conducted by CITE Research.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
