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Why Small Firms Are Less Likely to Offer a Retirement Plan

Industry Trends and Research

While most small employers believe that offering a retirement plan is important for hiring and employee retention, roughly half of small employers don’t offer one. Why?

In Why Do Some Small Businesses Offer Retirement Plans?, the Center for Retirement Research at Boston College looks at the characteristics of sponsoring firms and their employees to determine which small businesses may be more likely to offer a retirement plan in the future. 

In fact, numerous studies have shown that offering a retirement plan is closely related to firm size, such that firms with fewer than 100 employees are much less likely to offer a plan than larger firms. The percentage of firms with a plan is 95% at the largest firms and 48% at the smallest firms. Consequently, observers tend to dismiss small firms as a source for future growth in coverage—even though a meaningful share of small businesses do offer a retirement plan. 

Limited Information

While the task of identifying the characteristics of small firms that do provide coverage should be straightforward, CRR notes that there are limitations with a number of datasets explored for the study and no survey provides information on coverage by size in combination with firm characteristics, such as industry, age, average wage and the provision of health insurance. 

Among the sources were the National Compensation Survey (NCS), which provides coverage by industry, but does not provide coverage by industry by firm size, making it impossible to say anything about the importance of industry for small firms, the study explains. Two household panel surveys—the Panel Study of Income Dynamics (PSID) and the Survey of Income and Program Participation (SIPP)—–provide information to identify some characteristics of small firms that offer retirement plans. In addition, study looks at surveys conducted by the Employee Benefit Research Institute, The Pew Charitable Trusts and the Transamerica Institute.  

Coverage Traits

Not surprisingly, workers in industries that typically require a college degree, such as finance/professional or health care/education have higher coverage rates, the study notes. College-educated workers account for 43% of workers with retirement coverage compared with 27% of those without. Similarly, industries with unions, such as manufacturing, utilities and construction also have higher coverage rates, while the retail and hospitality industry has some of the lowest coverage rates.

Among the smaller firms that do and don’t provide coverage, firm size does not appear to be very different, with the firms with coverage having only slightly more employees, CRR notes. Earnings, however, are an important differentiator—with those with coverage averaging almost $70,000 compared to $39,000 for those without coverage. Similarly, hourly workers constitute a much smaller share of covered employees than those who are not covered. 

Three Main Barriers

In the EBRI, Pew and Transamerica surveys, smaller firms consistently cite three main barriers: 

  • the cost associated with establishing and administering a plan; 
  • uncertain revenues that make it hard for a firm to commit to a plan; and 
  • employee preferences for wages and other benefits.

The No. 1 concern in the Transamerica lineup is that the firm is not big enough, which, combined with “difficult business conditions,” suggests that the firm does not feel firmly enough established to introduce a workplace retirement plan. 

Cost shows up as the second most cited reason for offering a plan in the Transamerica survey and always ranks in the top three. In fact, cost and administrative complexity have always been an issue for small business, even though Congress has tried repeatedly to ease the burden of offering a plan. 

The EBRI and Pew surveys, however, both found that many employers were unaware of low-cost options, such as the simplified employee pension (SEP) or the Savings Incentive Match Plan for Employees (SIMPLE), for example. Moreover, the EBRI survey found that many did not realize that an employer match was not mandatory in 401(k) plans. Thus, a lack of accurate information may be a significant obstacle, CRR notes.  

The final major reason cited by employers for not offering a plan is lack of employee interest. Earlier surveys showed that small employers without a plan had a younger workforce, experienced higher turnover and paid lower wages. “It is reasonable to assume that these employees would prefer cash wages over benefits; they have bills to pay and do not see any obvious money left over for retirement saving,” the study observes, adding that employers have no interest in offering benefits that their employees would not appreciate.

Concluding Observations

The CRR notes that two of the reasons (do not feel that they are firmly enough established and employees don’t value the benefit) for not offering a plan seem understandable, but a “less compelling reason” is the concern that one would be too costly.

From an employer’s perspective, it may never make sense to offer a benefit that their employees do not value, even though many low-wage workers in testimonials about the state auto-IRA programs feel much better having some money saved to cover retirement needs or meet short-term emergencies.  

But because surveys have indicated a substantial lack of knowledge about the costs of the options and even the need to provide a match in a 401(k) plan, this area seems like “fertile ground to make inroads” into expanding coverage—especially with the advent of open MEPs and PEPs. 

“If it were possible to establish a plan as part of a multiple employer plan for, say, $10,000 and maintain it for $5,000 a year (including internal costs for administration), then those numbers should be splashed in headlines in the Wall Street Journal,” the study emphasizes. “If those numbers are not correct, then maybe plans are too costly. In any event, clarification of the costs seems like a useful thing to do.”