Overcoming Small Business Retirement Plan Hurdles

Misconceptions held by small employers and younger workers leave many unprepared for retirement

By Stephen Miller, CEBS Jan 28, 2016

Just one-third of U.S. companies with fewer than 20 employees offer retirement benefits, compared to nearly 98 percent of companies with 5,000 or more workers, according to Retirement Savings Trends, a research report by ADP, a payroll and benefits services firm.

Those findings dovetail with those in a new report by the Pew Charitable Trusts, Who’s In, Who’s Out, which revealed that only 22 percent of workers at organizations with fewer than 10 employers have access to a workplace savings plan, compared with 74 percent at organizations with 500 or more workers.

Earlier this week, the Obama administration announced its commitment to a series of proposals—some old, and some new—to help small businesses to provide their employees with access to retirement savings plans. But one of the largest roadblocks preventing smaller employers from offering retirement benefits is their own mistaken belief about the feasibility of doing so.

Small Business Misconceptions

“Part of the hurdle for small businesses is the myth that they have to be a large company to offer a retirement plan,” said Joe DeSilva, senior vice president and general manager of ADP retirement services in Florham Park, N.J. But “the benefits offered through a retirement plan, whether it’s a SIMPLE IRA or a 401(k) plan, can be realized regardless of company size,” he noted.

For small organizations, “their No. 1 concern is cash flow,” DeSilva said. “The thought of a 401(k) or similar plan brings on what I call a misperceived burden—that it’s going to cost them a lot of money. They worry about the incremental costs of maintaining the plan, and whether the compliance components will put them at risk.”

Often overlooked, “because it’s somewhat qualitative and not quantitative, is an employer’s ability to attract and retain talent by making available a benefit that competitors in the same market space may not offer.”

As they become better informed, small business owners may begin to see the advantage of providing retirement benefits with pre-tax dollars, and that the administrative burden is less than they might have thought.

DeSilva noted that ADP found the number of small businesses (in this instance, defined as those with under 50 employees) offering a retirement plan option rose 14 percent last year, with much of that growth occurring with SIMPLE IRAs, which is an option aimed at small employers.

Reaching Younger Workers

Both the Pew Charitable Trusts and the ADP reports revealed that younger workers—the Millennials—often aren’t taking advantage of workplace retirement plans when they are available.

Participation in 401(k) or other defined contribution plans was at 41.1 percent for employees ages 20 to 24, but rose to 65.6 percent for employees ages 55 and older, ADP reported. “The gap between access and participation proved largest among the youngest workers, many of whom face savings challenges even when they have access to retirement plans,” Pew found.

Millennials in their 20s are grappling with student loans and debt, and they’re holding off on saving. “For them, retirement is far away,” DeSilva said. “At the end of the day, you [should] combat that with overall education, driving awareness that saving early on and harnessing the power of compound interest in those low-income years when they’re entering the workforce is critical. Employers need to be telling that story.”

Automatic enrollment helps bring younger workers into a savings plan, but even when they do become participants, the level of their contributions is low. Automatic escalation—increasing the rate of salary deferral each year and requiring participants to affirmatively opt out of that increase if they so choose—can help. But while there is a high level of awareness around auto enrollment among plan sponsors, awareness of the value of auto escalation is much lower.

“Data suggests when you do auto-escalate, employees end up at retirement with larger nest eggs,” DeSilva noted.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.


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