In the world of retirement planning, perception and reality often travel different roads.
For many years, EBRI’s Retirement Confidence Survey has spotlighted the mismatch between American workers’ beliefs about retirement and their preparations for it.
For example, in 2018, 64 percent of workers said they were confident about living comfortably in retirement. Yet, only 38 percent had tried to figure out how much they needed to save to do that.
A newly released survey from Millennium Trust1 identified a similar perception gap among smaller employers. Many believe that sponsoring a retirement plan is simply too expensive, but relatively few have researched how much a plan would cost.
According to the survey, in 2018, 66 percent of participating employers said cost was the biggest barrier to offering a retirement savings plan, yet 45 percent had never researched any type of retirement plan.
And, only 23 percent had explored plans beyond a traditional 401k, like Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plans for Employees (SIMPLE) IRAs, and other types of plans designed specifically for smaller businesses like Payroll Deduction IRAs.
Typically, the costs associated with SEPs, SIMPLEs, and Payroll Deduction IRA programs are lower than the costs associated with 401k plans and often are paid by participants. SEPs, SIMPLEs, and Payroll Deduction IRA programs also tend to be simpler to administer than 401k plans.
For example, the SIMPLE IRA is a low-cost payroll deducted plan that:
- Limits participation to employees who have earned at least $5,000 during any two preceding years.
- Minimizes plan administration because it has simplified reporting requirements and no required non-discrimination testing.
- Offers tax incentives for business owners and participants.
Companies must have 100 or fewer employees to offer a SIMPLE plan, and they cannot have other retirement plans.
Each participant in a SIMPLE plan elects how much to contribute to his or her IRA through payroll deduction and chooses his or her asset allocation and investments.
Unlike a 401k plan, the employer must contribute to the SIMPLE IRA either through dollar-for-dollar matching up to 3 percent of the employee’s compensation or through a 2 percent non-elective contribution for all eligible employees.
The plan sponsor receives a tax deduction for employer contributions to employees’ accounts and also may claim a tax credit of up to $500 for each of the first three years to cover startup and employee education costs.
Additionally, Payroll Deduction IRA programs can be utilized by businesses of any size and are even more hands-off for the employer.
In a Payroll Deduction IRA arrangement, an employer gives its employees the opportunity to have deductions taken from their paychecks to contribute to Traditional or Roth IRAs that the employees set up for themselves. There is no employer contribution and minimal administration for employers because the accounts are individual IRAs.
Small employers are missing out on a tool that helps attract and retain talent
The Millennium Trust Small Business Retirement Survey shows that employers’ perceptions are costing them more than lost tax breaks.
They may be losing valued employees and not attracting new talent because companies that don’t offer retirement plans can be less appealing to employees than companies that do—especially in today’s day and age with an increased cost of living and longer lifespans.
One-third of employers surveyed said retirement savings plans were not very or not at all important to their employees, and about one-fourth (26 percent) somewhat or strongly disagreed that having a retirement savings plan would help their companies attract and retain talent.
The CEO of Hays US, one of the world’s largest specialist recruitment firms, recently wrote that health, dental, and retirement have become standard benefits that prospective employees expect companies to offer.
“If you’re not offering what are becoming basic benefits, you lose the opportunity to attract top candidates,” he argued. “In a job market where two-thirds of business owners are struggling to hire, and where the U.S. will need more than 3 million additional workers over the next 10 years, you can’t afford to miss out on exceptional hires.”
The vast majority of employees participating in the Millennium survey said the availability of a retirement plan was a key consideration when choosing a new employer and deciding whether to stay with an employer.
Small employers are the front line in America’s retirement crisis
One point on which employers and employees agreed was that Americans are not saving enough for retirement and many people will be unable to maintain their current lifestyles in retirement.
The predominant way in which Americans save for retirement is through employer-sponsored retirement plans, but not everyone has access to one.
In March 2018, 58 percent of full-time workers in private industry had access to defined contribution plans, like 401k, SEP, and SIMPLE plans. The percentage was lower (46 percent) among employers with fewer than 100 employees.
If we are going to overcome the retirement crisis in the United States, we need to educate smaller employers about affordable retirement savings plan options that are less onerous to administrate than 401k plans.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
1 The Millennium Trust Small Business Retirement Survey was commissioned by Millennium Trust company, and conducted by CITE Research (www.citeresearch.com). The online 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. The survey, one of the first of its kind to be conducted exclusively with employers that do not offer retirement benefits, was fielded between September 28 and October 8, 2018.