“Not enough is being done to help small business employees prepare for a comfortable and secure retirement,” says Catherine Collinson, retirement and market trends expert for the Transamerica Center for Retirement Studies. “Lower savings rates ultimately lead to a reliance on the future of Social Security, which underscores the need for a wake-up call among employers and employees alike.”
Employers and Employees Both at Fault
One major reason for this gap has to do with access to a retirement plan. Data from the survey found that only 65 percent of small business employees report being offered an employee-funded retirement plan, compared to 84 percent of employees at large companies. Meanwhile, 20 percent of small business employees reported not receiving any form of retirement benefit from their employer. Furthermore, among those with access to a plan, only 69 percent of small business employees reported being offered an employer matching contribution, while 86 percent of large company employees are offered one.
Employers are not entirely to blame, however. When offered a plan, small business employees are less likely than employees of large companies to participate or have money invested in the company’s plan (70 percent vs. 76 percent), while also contributing a slightly lower percentage of their salary (based on median). Moreover, small business employees are also less likely to be saving outside of work (52 percent, compared to 61 percent of large company employees). Of those small business employees that aren’t currently participating, 31 percent don’t plan to in the future.
One contributing factor to this discrepancy is that small business employees tend to earn less than employees at larger companies. However, small business employees are slightly less likely than large company employees to cite being “financially stretched” as a reason for not participating in their company’s retirement plan (26 percent vs. 29 percent).
“As the numbers of small businesses and small business employees in the U.S. continue to grow, it becomes increasingly vital that these employees receive the tools they need to prepare for a comfortable retirement,” says Collinson. “Under the current circumstances however, there are ample opportunities for employers and employees alike to help improve the status of retirement preparedness among small businesses.”
Small Business Employers Showing Little Signs of Future Improvement
In light of this difference between small and large companies offering plans, there is equally disconcerting data to suggest little progress is on the horizon: nearly three-quarters (73 percent) of small businesses that don’t currently offer a retirement plan indicated that they weren’t likely to in the near future. In fact, only three percent of small business surveyed stated that they were “very likely” to offer one in the near future.
The four most common reasons given by employers for not likely offering a plan in the next two years were: company is not big enough (43 percent), lack of management or employee interest (41 percent and 34 percent, respectively), and cost concerns (34 percent).
“While these reasons might be valid, it’s possible that they may too be misconceptions,” says Collinson. For example, 90 percent of small business employees consider a 401(k) or other employee self-funded plan to be important, while 61 percent said they would likely leave their job for one that does offer retirement benefits. Added Collinson, “Employers need to weigh these reasons against the costs of not offering a plan – such as a dissatisfied or shrinking staff.”
Taking Steps to Close the Gap
According to the survey results, small business employees are less likely than large business employees to feel that they are building a large enough retirement nest egg (60 percent vs. 70 percent) and are also more likely to believe that they won’t have saved enough by age 65, with one-quarter expecting to retire after age 65 or never.
Small business employers share their sentiment: 83 percent agree that their employees could work until age 65 and still not save enough and are much more likely than large company employers to be “not at all confident” in their employees ability to have a comfortable retirement lifestyle (12 percent vs. 4 percent, respectively).
“The bright spot is that there are plenty of things that small business employers and employees can do to help remedy this,” says Collinson. “Thanks to new legislation and innovative improvements to the retirement space, there are a number of tools available that meet the needs of both employers and employees to help pave the way for a more secure retirement.
Some steps that employers can take to better communicate with their employees and provide a retirement plan that helps them prepare for the future include:
- Read the need. If a plan is offered, make sure it's meeting
the needs of your business and employees. There are many
provisions within last year's Pension Protection Act that
may help enhance your current plan. If a plan isn't
currently offered, evaluate how that is affecting employee
satisfaction and examine ways to implement one.
- Consider all the options. The IRS has favorable tax rules
for small businesses to help their employees save. Maybe a
traditional 401(k) isn't the best option - look at other
options like a SEP or SIMPLE-IRA.
- Initiate ongoing dialogue with employees on the importance
of preparing for retirement. Even if offering a plan is not
an option at this stage, help direct employees in the right
direction with information on investment options like
traditional or Roth IRAs.
Some steps for employees that will help them take better control of their retirement security include:
- Start by enrolling in a plan. Your company-sponsored plan
is one of the simplest and most convenient ways to save.
It's also a tax efficient way to make sure you're keeping
more of your own money.
- If you're already participating in your employer's plan,
consider contributing more. Most people saving for
retirement don't max out their contribution limits, and a
large number don't even contribute up to their company
match. By not contributing at least that much you are
literally turning down free money.
- If you don't have access to a plan through your employer,
let your employer know that you would like to have one.
Also, consider contributing to a traditional or Roth IRA.
