Data has shown that having access to a plan matters—and the coverage “gap” is then a major concern. But the coverage gap is almost exclusively found among smaller employers—this week we asked readers for their “take”—and what might move that needle.
The reality is that the reason(s) for not offering a workplace retirement plan are perhaps as numerous and varied as the number of employers who aren’t (yet) doing so. And then there’s what they say—and what really matters.
Primary ‘Colors’
But whatever has been the case historically, we find ourselves in the midst of what has widely been characterized as the “great resignation,” with signs that what has long been relied upon to attract and retain workers is getting a renewed emphasis. While there are doubtless as many reasons as there are small businesses, we asked readers what they saw as the primary reason more small businesses don’t offer a retirement plan?
Here there wasn’t much disagreement—fully half of this week’s respondents said… cost.
27.5% - Administrative concerns
7.5% - Workers would rather have pay than a plan
7.5% - Concerns about cash flow
5% - Don’t know how to start on
2.5% - Government regulations
No one thought “vesting directs too much to short-term workers” or “concerns about litigation” were factors.
All of the concerns mentioned are factors in the decision. Some small employers would have one of the factors above as their primary reason.
I put cost but I rank these 4 all at #1 (in no particular order) Cost Administrative Concerns Do not know how to start one or maintain one Gov’t Regs
Admin, costs, and potential litigation. Why add one more thing to need to do?
They don’t realize the cost is low and there are tax credits available.
Many small businesses have thin profit margins that do not allow for much spending on benefits.
“Don’t know how” is the only other factor to my mind.
Whether that is true or not, I think the business owners think no one wants a retirement plan.
Direct and indirect cost: qualified plan cost for small employers is very expensive on a per-participant basis, especially if there is expected low participation. As an industry, the regulatory attempt to create fairness and transparency has resulted in increasing administration burden (direct and indirect cost). Non-discrimination test outcomes that ultimately require no or little contributions by HCEs/Owners and/or requires a safe harbor contribution design/fix, only increases cost. (direct cost). In CA, cost of a 401(k), if an advisor and TPA is included is $7,000-$10,000 unless you price based on assets, which usually requires at least 1% on assets to be taken from participants, further eroding their already limited buying power. If there are fewer than 10 employees in the company, the retirement savings per employee (assuming lower income EEs) is better off with the employer signing up for CalSavers and providing $1000 per employee as a CalSavers contribution.
Many small businesses operate on a shoestring. Giving the staff a small raise—even if it is deferred compensation—can be too much for the business to handle. The darn “top heavy” rules, along with other required contributions, are a pox on plan formation.
Cost and Administrative responsibilities are tied and far outweigh all others issues by a mile.
And cost, and many just don’t care or have time for it.
Many small market segments have almost zero retirement plan coverage simply due to lack of time; Joe/Jane the plumber or Joe/Jane the restaurant owner is work 80-100 weeks; there is simply no time to even think about retirement plan administration. That’s why you see a lost more retirement plan in certain firms, such as doctor’s/dentist’s offices, because there is simply more time there to work on a plan (and if there isn’t, the practice typically has sufficient cash flow to simply hire another person).
There’s too much bad information on what the REAL administrative effort/cost/compliance factors are, and quite honestly, not enough people who know what they are talking about selling it to these people.
There are many reasons small employers don’t offer plans and the owner being a jerk or not caring about their employees is pretty far down the list.
I think it’s a combination of costs and the internal resources it would take to support a retirement plan.
The cost benefit analysis on what employees value (current pay vs employee benefits) weighed against the additional administrative duties and costs, is the primary formula that I think small businesses use when making this decision.
Resignation Notions
We then asked if readers thought the “great resignation” would/has generated more interest in retirement savings programs.
30% - Definitely
22.5% - For some, not all
20% - For a few, not most
17.5% - It already has
10% - I doubt it
When competing for people, benefits are all the sudden very important for recruitment and retention
Costs for materials, supplies and labor are all up and small businesses typically do not have the profit margin to absorb them.
Dynamic creates a tighter labor market that in-turn creates more interest in benefits, of which a retirement plan is one.
We have seen many employers come to us to enhance recruitment and retention,
In the small space, possibly, especially if they don’t offer it at all. It’s still a lever, but as usual lower on the list, both higher wages and work from home or virtual from anywhere flexibility are the things I hear the most from all sizes and industries as being the big drivers.
Again, it is a time issue. if i’m Joe/Jane the restaurant owner and I can’t hire more workers, i am going to opt for the zero time/effort solution of simply increasing wages for new hires (or providing a sign-up bonus, which i see many retail locations doing now) rather than enhancing whatever benefits I may provide (or adding benefits if i don’t provide them).
If anything, it has forced some employers to step up their game. An employee will leave a company without a plan for a company that has one, and will leave one without a match for one with a match, and so on... but I don’t think the 401(k) is at the top of the list for people that are leaving their jobs, rather it might be a factor, not the reason.
It’s a tremendous form of compensation and I think that is finally being recognized.
Savings in retirement plans has been very poor amongst a large percentage of people anyways, so we already know people are willing to forego retirement for current needs. I don’t see that changing too much, but it may help attract your “superstar” employees.
Closing the Gap?
Finally, we noted that many potential solutions have been put forth and/or tried to close the coverage gap among small businesses—and asked which of the following did readers think would be most likely to do so?
38% - SECURE 2.0 tax credits
26% - State-run IRA programs for private sector workers
15% - Pooled employer plans (PEPs)
13% - Higher benefits limits
8% - Increased emphasis/interest because of the “great resignation”
In California, the requirement to have something has created a big push for new retirement plans. The mandate has really moved the needle on new plan formation outside of the State run program.
Less potential legal exposure for PS. The new fines for improper admin is a deterrent to starting a plan, especially for small plans that don’t have dedicated resources.
Once they know that they have to offer something, many will turn to a private sector option.
Tax credits will at least offset the cost of the retirement plan. Also, with fewer workers available employers need a plan to be competitive.
Small businesses will only spend more on employees if there is a perceived need. The Great Resignation will require employers to examine their total pay packages.
Federal mandate is the only thing that will really work.
Simplify the administration requirements. PEPs are overly expensive as well either in asset fees to fee each entity in the PEP foodchain, or they are expensive because they require safe harbor contribution (Example: Fidelity has a good PEP but it is only available for new start up plans, but it takes over 3 months to get it started and it requires the 4% safe harbor match.)
The tax credits for a new plan are very important and should be on the list. We should find a way to enhance them.
PEP with a built-in payroll solution, that’s the key as that’s a major barrier to entry. Combined with 3(38) and 3(16) solutions you’ve mitigated the greatest issues. More MEP-like design where employers can simply select 3% QNEC or 100% to 4% safe harbor to lessen the # of decisions, HCE concerns and therefore stress on employer in setting up a plan.
Even with the opt-out rate, State plans are covering a ton of small business employees. Higher benefits limits typically favor the small business segments who are likely to have plans anyway (like the doctor’s/dentist’s offices above), and the other three solutions here all do not eliminate the employer work involved (yes, i do realize that PEPs eliminate much ongoing work, but you still have to implement a PEP), which is the primary barrier.
Making it meaningful for a small business to offer a plan is where we need to start. Tax credits area great step forward. Higher benefits limits would be next, and an option not listed here, less “limiting” of the people trying to take advantage of those higher limits. In a small business, it’s almost always the person with the biggest paycheck that’s footing the bill for these plans, we need to make it worthwhile for them to benefit or they just won’t bother. PEP’s are just another shiny object that don’t really solve the problem, and state-run IRA’s won’t gain any traction because no one trusts the government to handle their money.
None of the above. People don’t realize that many of these small business are younger businesses that cannot afford a retirement plan, or the do not quite make enough to afford such a plan. Many financially fortunate small businesses do sponsor retirement plans.
Employers who don’t see benefits in setting up a plan for themselves tend not to setup a plan for their employees either.
Other Comments
We must make it easy for small businesses. No testing, easier governance, safe harbors to protect against litigation..
The tax credits help, but let’s not base them on NHCEs covered. I am in favor of a mandate. The only way out of this crisis is to get workers in their 20s to start saving a little. Important to make sure this is a private sector thing, not where the funds go to, or come from, the government.
Most small businesses are primarily run by an owner who makes the decisions, and many times if there isn’t a big enough benefit for the owner, or the cost is too much, they won’t put a plan in place. Cash flow is one of the biggest concerns for small businesses. Safe Harbor requires a match, but it’s the only plan version that really helps a small business owner benefit from the plan. In many cases a 3.5-4% match will cost tens of thousands of dollars, but the owner can only “save” a few thousand in taxes. So typically they won’t put a plan in place at all if they can’t benefit (i.e. traditional 401k). If there was a way to give owners the ability to save at a higher capacity than an IRA without the additional burden of matching (or lower burden) their employees I think more small businesses would put plans in place. I sold small market 401k at Paychex for almost 7 years, and this was a primary reason many small businesses didn’t move forward with a plan.
Increase limits Increase tax incentives for small business owners to start plans Streamline govt regs and admin
The autos are the only thing that really work. required plans, with auto enroll and increase, with a set standard of rules. Limited admin, limited reporting, limited liability.
Retirement Plans and Health Care Benefits should be mandatory programs for companies of all size. Employees should be required to contribute 6% into the plan. Employers should be required to put in 4%. No discrimination testing, no loans, rollovers mandatory. Target Date and Risk Based Investments only.
The only way to close the coverage gap is to take if from employee’s pay. But this will not work as there are people whose pay barely covers their cost of living. With inflation increasing, this situation will only get worse. The best bet would be for Congress to stop passing bills that we can’t pay for and get inflation under control. Bringing some manufacturing to this country so we aren’t dependent on China (or Russia) might be nice.
It looks to me that the state run plans that do not require an employer contribution will be the best way to cover the gap. Many advisors do not want to take on very small plans because they cannot charge enough to make a profit.
Federal mandate is the only thing that will really work.
It’s an increasingly frustrating and expensive world for small businesses, on all sides, as Federal and State mandates and agency regulations create an ever-increasing expensive environment to be a business. Technology has helped and hurt in this regard as well.
I am all for a mandate. The only solution is to get people in their 20s and 30s to create some savings for themselves.
The state mandated plans are an issue, but it has elevated the need for small employers to start plans. Until fines are assessed for not offering, it’s still an unknown variable for most small-employers. It’s not widely publicized, think we can do better on that front and offering up alternatives (PEPs).
Our industry is decades late focusing on coverage, hence, the proliferation of state mandated programs. In the long run, coverage is only a headline. Programs that require only nominal savings rates fail, too. We need to get millions of people on track to saving a rate that will meet their future retirement income needs.
A lot of it is apathy, it’s hard to fight inertia And therefore hard to change course and get on a retirement plan, I think the more automatic features of plant has the better.
How about a federal mandatory retirement plan for small business where the feds did all the work?
We’ve had 20+ years of tax incentives to close the access gap. Yes, incentives are important but they have proven they cannot solve the problem. While I don’t care for the state programs, the mandates are proving effective. I doubt it will be included in Secure 2.0 but Chairman Neal’s inclusion of a mandate in the house version at the Federal level was a step in the right direction. Whether it should be ERISA-covered or not I will leave to greater minds.
The majority of small employers likely won’t offer retirement plans until there is a very strong incentive to do so. My business is located in California, and all employers with 5 or more employees will soon be required to offer a retirement plan or participate in CalSavers. That type of incentive will impact the number of small employers offering some type of retirement solution more than the great recession, SECURE Act 2.0, or any of the potential drivers mentioned in question 3.
Plans are sold, not bought. With the overwhelming majority of retirement plans currently in the industry “sold” by financial advisors, there needs to be a way to compensate advisors on small plans that isn’t 100% asset based or large fixed-cost based. Something attractive to advisors and attractive to small businesses. Solve that and the coverage gap will start to shrink dramatically!
The regulatory rules for vendors and advisors is actually hurting (not helping, as it’s intended) small business retirement plans. Most advisors don’t even work with plans below a minimum size ($1M or so?). PEPs MAY move the needle but I’m not seeing that too much, at least not yet.
Thanks to everyone who participated in this week’s NAPA-Net Reader Radar poll!
