Why Small Business Owners Often Resist 401(k)s

Two of the reasons most commonly cited by small business owners for not offering a retirement plan are the beliefs that their business is too small to qualify and that they can’t afford a match.

At a time when many companies are boosting 401(k) benefits to attract and retain employees in a tight labor market, 74% of small businesses still do not offer a retirement plan for their employees, according to survey data published by ShareBuilder 401k.

According to the survey, many small business owners mistakenly believe their business is simply too small and that 401(k)s are too costly.

The survey, which polled 500 small business owners from across the country, reveals that 26% currently offer a 401(k) plan. Responders cited three main reasons for not starting a plan. Some 58% believe their business is too small to qualify for one, 32% say they can’t afford a match and 24% believe 401(k) plans are too expensive to set up and manage.

“The truth is that any business, regardless of size—and including the self-employed—can offer a 401(k) plan. There are very affordable, low-cost options, and matching is not required,” says Stuart Robertson, president and CEO of ShareBuilder 401k. “This new survey data indicates that, as a society and industry, we have to do a better job of educating the market and de-bunking misperceptions.”

Among the small businesses with a plan, a large majority (71%) started their 401(k) because they felt a personal responsibility as a business owner to provide one. In addition, 47% say they thought it helped their business attract and retain employees; 26% wanted to receive the tax benefits of a 401(k); and 21% wanted to save for their own retirement.

However, the survey found that many misperceptions remain prevalent. Among the most problematic, Robertson says, is the perceived cost of purchasing and maintaining investments.

“Investing can feel intimidating or opaque, and it is important for employers and employees to know to try keep all-in in investment expenses under 1%,” Robertson says. “This includes fund expenses and investment management. The difference of paying 1% more in investment expenses over a 40-year career can result in a nest egg that is hundreds of thousands of dollars less, which can truly impact your retirement. Every dollar spent on expenses is one less dollar invested in the markets.”

As small employers look at ways to offer their employees access to retirement plans, data shows that interest in pooled employer plans has increased significantly.

Created in the wake of the 2019 Setting Every Community Up for Retirement Act, pooled employer plans allow unrelated employers to convene to participate in a single 401(k)-type plan sponsored by a registered pooled plan provider. The goal of many of the provisions in the SECURE Act is to encourage employers that did not previously provide retirement plans to their employees to offer one.

More recently, the U.S. House of Representatives passed the Securing a Strong Retirement Act. If passed by the Senate in its current form, the bill would enhance the retirement plan start-up credit, making it easier for small businesses to sponsor a retirement plan.

In part to address the small business retirement plan coverage gap, various states have adopted state-facilitated retirement savings programs, with the potential to reach a collective 20 million workers. Although many of these efforts are in the early stages, multiple programs—including CalSavers, Illinois Secure Choice and OregonSaves—have already accumulated close to $420 million in assets. These three systems cover nearly 440,000 savers working for 47,000 employers.

According to the leaders of these programs, most small employers would have to do very little for their employees to be able to participate. In Pennsylvania, for example, employers would only have two tasks—to provide an employee census to the Treasury and to allow the system to process payroll deductions. In Virginia, the program will help with basic financial information, education and outreach, along with retirement and education savings. Additionally, the state plans to combine educational and communication resources for citizens who may be underserved and underrepresented.