A recent study conducted for the Small Business Administration has troubling news for advocates of employer-based retirement plans. The study analyzed the availability and acceptance of employer-based retirement plans at companies with less than 100 employees.
According to the study, 72 percent of small business employees do not have access to employer-based retirement plans. An additional 9 percent have access to a plan, but choose not to participate. Small businesses employ around half of all employees in the country and are responsible for 65 percent of net new jobs created. If 81 percent of these employees aren’t using or don’t have access to retirement plans, the consequences are troubling for the employee, for tax payers and for the country.
Why do so few small businesses offer retirement plans?
Cost is definitely a factor. According to a study performed by Deloitte Consulting on behalf of the Investment Company Institute, the national association of U.S. investment companies whose members manage over $12 trillion in aggregate, the cost of managing a 401(k) defined contribution plan for small businesses is anywhere from two to eight times more expensive when compared to the cost for large companies. The basis used for comparison is the percentage of assets under management charged as fees.
Beyond cost, complexity is also a consideration. Setting up a retirement plan for a small business is no easy task. Using an outside consultant to do the work has fees and doesn’t guarantee that the owner has a complete understanding of the plan. This complexity turns off many small business owners who want to reward employees but would rather look for simpler ways to do so.
Uncertainty is also an important factor. According to the U.S. Census Bureau, half of all companies close after five years in business and only 25 percent stay in business 15 years or more. With such high failure rates, small business owners are understandably wary of making long-term commitments to employee benefits when their own well-being is still in doubt.
New tool to help turn the tide in favor of retirement plans
In order to help small business owners evaluate retirement plan options and to streamline the process of offering a plan to employees, a new resource has been created. It was established with the joint efforts of the U.S. Department of Labor‘s (DOL) Employee Benefits Security Administration and the American Institute of CPAs (AICPA).
Choosing a Retirement Solution for Your Small Business is a web-based resource center that offers:
- An overview of the key types of retirement plans available to small businesses
- An interactive tool that allows users to identify plan options for their company
- A general guide on retirement planning basics
- A list of resources
In addition to Choosing a Retirement Solution for Your Small Business, other resources worth consulting include:
- IRS Publication 3998 - Choosing a Retirement Solution for your Small Business
- Tax Forum presentations – These presentations were sponsored by the IRS over the past two years and address Roth IRA conversions, SIMPLE, IRAs, SEP plans, retirement planning for self-employed people, 401(k) plans and more
- Department of Labor publications – Over 20 publications on retirement planning for businesses
What’s next for small business retirement plan offerings?
With unemployment likely to stay above 9 percent for the foreseeable future and the economic outlook remaining uncertain, it is likely that the seven out 10 small businesses that don’t offer retirement plans will maintain the status quo. What the retirement industry needs is innovation. Small business retirement plans need to be inexpensive to launch, easy to manage and flexible enough to be transferred, wound down or modified if warranted. This type of innovation will require changes to existing law, the use of technology to reduce transaction costs for plan providers and an unemployment rate low enough to motivate small business employers to begin competing on benefits.
Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.