Overcoming Small-Company Retirement Plan Challenges

By Stephen Miller, CEBS Oct 7, 2013

At American companies with 10 to 499 employees, a large majority of workers (88 percent) value 401(k) or other retirement plans as an important benefit, but only 58 percent are offered such a plan by their employer, according to the nonprofit Transamerica Center for Retirement Studies (TCRS).

Findings from the 14th Annual Transamerica Retirement Survey, released in October 2013, revealed that 72 percent of small U.S. companies offer a 401(k) or similar employee-funded plan, such as a simplified employee pension (SEP) or SIMPLE IRA, including 71 percent of micro companies (10 to 99 employees) and 89 percent of small nonmicro companies (100 to 499 employees). By comparison, this is true of 95 percent of large companies (500 or more employees).

Part-Time Workers Left Out

Despite the high percentage of small businesses that report offering retirement plans, there is a pervasive gap in plan coverage: At small companies, only 36 percent of part-time employees are offered a 401(k) or similar plan, compared with 68 percent of full-time workers.

This coverage gap also persists among large companies, at which 90 percent of full-time workers, but just 51 percent of part-time workers, are offered a plan.

Among the 28 percent of small companies that do not offer a retirement plan, only 22 percent said they are likely to provide one in the next two years. However, nearly one-third (32 percent) indicated they would be likely to consider joining a multiple employer plan (MEP) offered through a vendor that handles many of the fiduciary and administrative duties at a reasonable cost.

Reluctance to Auto Enroll

A mere 19 percent of small businesses have adopted automatic enrollment, including 18 percent of micro companies and 29 percent of nonmicro companies, the survey found. By comparison, 43 percent of large companies offer auto enrollment.

“Automatically enrolling eligible employees into the plan, with the ability for them to opt out, has been widely recognized as one of the most effective ways to increase plan participation rates. However, few small companies take advantage of it,” said TCRS President Catherine Collinson. “Working with their retirement plan provider, and advisors, employers may find automatic enrollment to be more affordable than they might think.”

The median default contribution rate is 3 percent of annual salary among automatic enrollment plans offered by both small and large companies.

“Plan sponsors utilizing automatic enrollment should consider increasing the default contribution rate from 3 percent to 6 percent and adding an auto escalation feature that increases participants’ deferral rates annually,” Collinson suggested. “Three percent sends a potentially misleading message to employees that it is adequate for retirement when, in most cases, it is not.”

Workers' Retirement Outlook

The 2013 estimated median household retirement savings of Baby Boomers—the generation closest to retirement—is lower among small-company workers ($92,000) than large-company workers ($113,000).

These 2013 savings levels represent a large increase from 2007, when Boomers’ estimated median household retirement savings was just $60,000 for those at small businesses and $91,000 for those at large ones.

As the economy continues its recovery from the recession, most small-company employees (59 percent) plan to work past age 65 or do not plan to retire, a slightly higher percentage than those employed by large companies (56 percent). Small-company employees (55 percent) also plan to continue working after they’ve retired, including 45 percent who want to work part time and 10 percent who desire a full-time job.

Among those who expect to continue working in retirement, two-thirds (66 percent) cited the desire or need for the extra income or health benefits.

Although this is a good way to continue building retirement income, just 20 percent of small-business workers have a backup plan in case they are forced to retire sooner than they expected because of job loss or health issues. More than half of recently retired Americans left the workforce earlier than they planned, a separate 2013 study revealed.

“Starting a dialogue between small-company employers and their employees about retirement benefits can help to better align educational offerings with more of the information that workers need to achieve their retirement goals,” Collinson advised.

Recommended Actions

The TCRS suggests that small businesses take the following steps to help their workers overcome retirement savings challenges:

  • Offer a retirement plan, along with other health and welfare benefits, if one isn’t already in place. Take advantage of the tax credit available for starting a plan.
  • Extend eligibility to part-time workers. Seek the expertise of retirement specialists who are familiar with plan design.
  • Add auto enrollment and auto escalation features to increase participation and salary-deferral rates. Consider structuring the employer's matching contribution to promote higher salary deferrals. For example, instead of matching only 50 percent on the first 6 percent of deferrals, consider adding a small match, such as 10 percent or 15 percent, on the deferrals between 6 percent and 10 percent.

“Much of the public-policy discussion around retirement security has focused on encouraging more small employers to offer a plan,” Collinson observed. “However, it is critical to note that plan sponsorship is not synonymous with plan coverage.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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