Small Businesses May Forgo Retirement Plans

The SECURE Act of 2019, followed by SECURE 2.0 in 2022, was intended to facilitate the implementation of retirement plans for companies of all stripes. A major goal was to reduce administrative burdens, particularly on small businesses, which should especially benefit from the extension of low-cost options and limited contribution matching.

However, employees at smaller companies still lack access to the kinds of retirement plans provided by larger enterprises. Among the plethora of surveys conducted regularly, the Transamerica Institute reports that small firms are much less likely than their more substantial brethren to offer their workers 401(k) plans or similar benefits.

Which companies are offering plans?
Among Transamerica's respondents surveyed in May, 58% of small businesses are making plans available, but that glass is only half full: 34% do not. Another survey, conducted by Capital Group, examines the smallest fry. In truly boutique operations, those with fewer than 10 employees, only 28% of those surveyed currently provide plans. And among slightly larger businesses that are engaging 10 to 24 workers, only 51% provide plans. Yet it appears that many are almost ready to embrace SECURE 2.0 and its provisions. An impressive 42% of the laggards indicated they are likely to launch retirement plans in the next couple of years. The levels of savings in 401(k) accounts across the board tell a similar story. Among the largest companies, employees, on average, have socked away $115,000 in their retirement vehicles; in midsized firms, the average nest egg comes to $69,000; while in small operations, workers have accumulated only $36,000 in their accounts.

Capital Group, which surveyed 600 employees and business owners, discovered that 73% of owners claim they expect to offer plans within two years; however, so far, only 49% have acted. It might be too early to count the chickens.

Pew Research has carried out extensive research on which companies are offering plans and how employees are taking them up. It found that some industries — notably, those that employ more full-time workers — are more inclined, are more financially stable and generally provide broader benefits. Typical areas include management, professional services, production and transportation. Older businesses with more established finances are also more likely candidates, as are those that are incorporated.

Why businesses balk
Companies tend to give three principal reasons for not providing retirement plans:

• They are not large enough. Firms need to reach a certain level of financial stability before they are equipped to take responsibility for plans.
• Costs.
• Their employees are not interested enough. When Pew surveyed workers in 2017, it found that 93% of business owners believe their employees would prefer higher salaries over retirement benefits. Even among benefits, employees tend to prioritize health plans or personal time off over retirement support.

Another reason employees may not fully appreciate retirement benefits is a lack of familiarity with plan options, which comprise a daunting alphabet soup. They are, of course, aware of 401(k)s, which are by far the most popular. They are less conversant, however, with simplified employment pension plans, savings incentive match plans for employees or "my retirement accounts," all of which have been tailored expressly for small businesses and individuals. They also may not have considered pooled employer plans, which allow a group of companies to pitch in together to run a single 401(k).
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So why do some small companies offer plans? Some business owners are paternalistic and may be motivated by personal responsibility for their workforces. Many view them as a magnet to attract and retain employees or potential tax benefits. Finally, perhaps less altruistically, many business owners have their own retirement in mind when they structure a group plan.

Busy, busy
Retirement gets lost among the cracks. Small-business owners are frantically busy and concentrated on running day-to-day activities. Their schedules are a constant race against time as they navigate challenges, from putting out brushfires to finding new customers or arranging new rounds of funding. They are constantly juggling costs, exacerbated by the backdrop of inflation.

Do any of these describe your business? Talk to your financial advisers about enlisting professional help. They may suggest finding a provider to support you with plan design, compliance testing, IRS forms and integrating payroll functions to manage employees' contributions.