Small Plans Can Have Big Gaps

Small companies (10 - 499 employees) face retirement plan coverage and participation, as well as employee retirement readiness, challenges, a report suggests.

The report from the Los Angeles-based Transamerica Center for Retirement Studies (TCRS), part of the 14th Annual Transamerica Retirement Survey, says 88% of small company workers value 401(k) or similar plans such as SIMPLE IRAs or SEPs as an important benefit, but only 58% are offered such a plan by their employers.

“Small businesses are the cornerstone and growth engine of the U.S. economy. They are represented in all industries and generate a wide range of revenue, earnings, and payroll,” said Catherine Collinson, president of TCRS. “Small businesses’ offering of retirement benefits can positively affect the retirement outlook of the millions of American workers they employ.”

Plan Sponsorship and Coverage for Part-Time Employees

The research looked at retirement benefits offered among small companies (10 to 499 employees), including micro companies (10 to 99 employees) and small non-micro companies (100 to 499 employees) and found 72% of small companies offer a 401(k) plan or a similar employee-funded plan (e.g., SEP, SIMPLE, other), including 71% of micro companies and 89% of small non-micro companies, compared to 95% of large companies (500 or more employees).

Despite the high percentage of small businesses that report offering plans, the findings reveal a gap in plan coverage, namely part-time workers. At small companies, only 36% of part-time workers are offered a 401(k) or similar plan, compared to 68% of full-time workers. This coverage gap also persists among large companies in which 90% of full-time workers are offered a plan, compared with only 51% of part-time workers.

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

The report notes that among the 28% of small companies that do not offer a plan, only 22% said they are likely to offer a plan in the next two years. However, nearly one-third (32%) indicated they would be likely to consider joining a multiemployer plan offered through a vendor who handles many of the fiduciary and administrative duties at a reasonable cost.

Small Businesses Reluctant to Automatically Enroll

According to the report, only 19% of small companies have adopted automatic enrollment, including 18% of micro companies and 29% of non-micro companies. By comparison, 43% of large companies offer automatic enrollment. The median default contribution rate is 3% of annual salary among automatic enrollment plans offered by both small and large companies.

“Automatic enrollment, which automatically enrolls 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 Collinson. “Working with their retirement plan provider and advisers, employers may find automatic enrollment to be more affordable than they might think.”

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

Retirement Outlook of Small Business Employees

According to Collinson, perhaps the ultimate measure of a worker’s retirement outlook is the level of household savings in all retirement accounts. The 2013 estimated median household retirement savings among Baby Boomers, the generation closest to retirement, is lower among small-company workers ($92,000) compared to large- company workers ($113,000). These 2013 savings levels represent a large increase from 2007, when the estimated median household retirement savings among Baby Boomers was just $60,000 for small-company workers and $91,000 for large-company workers.

As the economy continues its recovery from the recession, most small-company workers (59%) plan to work past age 65 or do not plan to retire, a slightly higher percentage than those of large companies (56%). Small-company workers (55%) also plan to continue working after they have retired, including 45% who plan to work part time and 10% full time. Among those who plan to continue working in retirement, two-thirds (66%) plan to do so because they want or need the income or health benefits. Just 20% of small-company workers have a backup plan if retirement comes sooner than expected due to job loss or health issues.

The research also found the majority of small-company workers (56%) would like more information from their employers about how to reach their retirement goals, yet fewer small-company employers (42%) believe this to be the case. Only 11% of small-company workers had spoken to their employer about retirement benefits, and only 29% of small-company employers had surveyed their employees about the topic.

“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,” said Collinson.

To overcome retirement savings challenges, the TCRS recommends small businesses:

  • Offer a retirement plan along with other health and welfare benefits if not already in place, as well as take advantage of the tax credit available for starting a plan;
  • Seek the expertise of retirement specialists familiar with plan design to extend plan eligibility to part-time workers;
  • Proactively encourage participation in existing retirement plans;
  • Consider adding automatic enrollment and automatic escalation features to increase participation rates and salary deferral rates; and
  • Consider structuring match to promote higher salary deferrals. As a hypothetical example, instead of just matching 50% of the first 6% of deferrals, consider adding a small match such as 10% or 15% on deferrals between 6% and 10%.

For the report, surveys were done of both employers and employees. These surveys were conducted by Harris Interactive on behalf of the TCRS. The employer survey was done by telephone between April 23 and August 15 among 750 companies. The employee survey was done online between January 21 and February 21 among 3,651 full-time and part-time workers.

More information about the report is available here.