While most small employers believe that offering a pension plan is important for hiring and retaining employees, about half of small employers do not. Why?
In Why do some small businesses offer retirement plans?Boston College’s Center for Retirement Research examines the characteristics of corporate sponsors and their employees to determine which small businesses are most likely to offer a retirement plan in the future.
In fact, numerous studies have shown that the provision of a pension plan is closely related to company size, such that companies with less than 100 employees are much less likely to offer a plan than large companies. The percentage of companies with a plan is 95% in the largest companies and 48% in the smallest. Consequently, observers tend to dismiss small businesses as a source of future growth in coverage, even though a significant share of small businesses offer a pension plan.
While the task of identifying the characteristics of small businesses that provide coverage should be simple, CRR notes that there are limitations with a number of datasets explored for the study and that no survey provides coverage information by size in combination with company characteristics, such as industry, age, average salary, and provision of health insurance.
Sources included the National Compensation Survey (NCS), which provides coverage by industry, but does not provide industry coverage by company size, making it impossible to say anything about the importance industry for small businesses, says the study. Two household panel surveys – the Study of Income Dynamics Panel (PSID) and the Survey of Income and Program Participation (SIPP) – provide information to identify certain characteristics of small businesses that offer retirement plans. In addition, the study examines surveys conducted by the Employee Benefits Research Institute, The Pew Charitable Trusts, and the Transamerica Institute.
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. Workers with a college education represent 43% of workers with pension coverage compared to 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 highest coverage rates. lower.
Among small businesses that do and do not offer coverage, the size of business does not appear to be much different, with covered businesses having only slightly more employees, the CRR notes. Income, however, is a big differentiator, with those covered averaging nearly $70,000, compared to $39,000 for those without. Similarly, hourly workers make up a much smaller share of covered employees than those who are not.
Three main obstacles
In the EBRI, Pew and Transamerica surveys, small businesses consistently cite three main barriers:
- the cost associated with establishing and administering a plan;
- uncertain revenues that make it difficult for a business to commit to a plan; and
- employee preferences for salary and other benefits.
The No. 1 concern in the Transamerica lineup is that the company is not big enough, which, combined with “difficult business conditions”, suggests that the company does not feel firmly established enough to introduce a pension plan. workplace retirement.
Cost appears as the second most cited reason for offering a plan in Transamerica’s survey and consistently ranks in the top three. In fact, cost and administrative complexity have always been an issue for small businesses, even though Congress has repeatedly tried 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 Simplified Employee Retirement (SEP) or Employee Savings Incentive Plan (SIMPLE), for example. Additionally, the EBRI survey found that many were unaware that an employer match was not required in 401(k) plans. Thus, a lack of accurate information can be a significant obstacle, notes the CRR.
The last major reason given by employers for not offering a plan is lack of employee interest. Previous surveys have shown that small employers without a plan have a younger workforce, experience higher turnover and pay lower wages. “It is reasonable to assume that these employees would prefer cash wages to benefits; they have bills to pay and see no obvious money for their retirement savings,” the study observes, adding that employers have no interest in offering benefits that their employees would not appreciate.
The CRR notes that two of the reasons (not feeling established enough and employees not enjoying the benefit) for not offering a plan seem understandable, but a “less compelling reason” is fear that one will be too expensive.
From an employer’s perspective, it may never make sense to offer a benefit that their employees don’t appreciate, even though many low-wage workers in testimonials about state self-IRA programs feel much better having money saved to cover retirement needs or meet short-term emergencies.
But because surveys have indicated a substantial lack of knowledge about option costs and even the need to provide consideration in a 401(k) plan, this area appears to be “fertile ground for making inroads” in expansion. coverage, especially with the advent of open MEPs and EPPs.
“If it were possible to set up a plan as a multi-employer plan for, say, $10,000 and maintain it for $5,000 a year (including internal administration costs), then these numbers should be front page news. the wall street journal“, underlines the study. “If those numbers aren’t right, then maybe the plans are too expensive. In any case, clarifying the costs seems like a useful thing to do.