REVENUE UNCERTAINTY AND WORKER PREFERENCE KEY REASONS WHY SMALL FIRMS DON'T OFFER A RETIREMENT PLAN

June 17, 1999

WASHINGTON, DC--Contrary to conventional wisdom, red tape and high costs are not the main reasons why so many small businesses do not offer a retirement plan to their workers, according to results of the 1999 Small Employer Retirement Survey (SERS) released today. In a poll of more than 600 small employers (companies with 100 or fewer full-time workers), uncertain revenue and employee issues (such as a lack of demand by workers) are cited as equally or more important reasons why small businesses do not sponsor a plan. This may explain why, despite repeated public-policy initiatives to boost retirement plan sponsorship among small employers, actual coverage remains low, compared to medium- and large-sized firms. If this trend continues, 38 million Americans who work for small employers could face a bleak retirement because of insufficient funds. The 1999 SERS, released today by the nonpartisan Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC), and Mathew Greenwald & Associates (MGA), also shows that small employers lack a certain level of knowledge and understanding about retirement plans. In addition, the survey found a notable difference between the employee characteristics of small companies that offer a retirement plan and those that do not (e.g., age, salary, retention, etc.). Small employers are a big source of employment, accounting for 41 percent of all private-sector wage and salary workers in the United States. However, they are not a big source of retirement plan coverage. According to a 1998 EBRI report using the latest available data, 85 percent of workers at large companies (100 or more employees) were offered an employment-based retirement plan and two-thirds actually participated in the plan. At very small employers (less than 25 employees), only 20 percent of the workers were offered a plan and just 15 percent participated. Highlights from the Survey

Major reasons why small employers do not offer a retirement plan: • Revenue uncertainty (19 percent of nonsponsors rated this as the most important reason; 50 percent of all nonsponsors said it was a major reason). • Workers are seasonal, part-time, or high-turnover (19 percent cited this as the most important reason). • Employee preferences for wages and/or other benefits (17 percent cited this as the most important reason). • Plan costs too much to set up and administer (12 percent cited this as the most important reason) and required company contributions are too expensive (10 percent cited this as most important). Nonsponsor companies tend to have lower revenue and employees who are younger, earn lower salaries, have less formal education, and are short-term. Retirement planning is not a priority among these workers, so their employers apparently are less inclined to offer a plan. Key factors that characterize small firms without retirement plans include: • Company revenue (only 18 percent of small employers without retirement plans reported annual gross revenue of $2 million or more, compared with 48 percent of small employers that do sponsor a retirement plan). • Younger workers (23 percent of plan nonsponsors reported that most of their employees are under age 30, compared with 11 percent of plan sponsors). Smaller salaries (32 percent of nonsponsors reported that most of their full-time workers earned less than $20,000 annually compared with 9 percent of plan sponsors). • Less education (58 percent of nonsponsors reported that most of their full-time employees have a high school education or less, compared with 41 percent of plan sponsors. Twenty percent of plan sponsors reported that most of their full-time employees have a college degree, compared with 9 percent of nonsponsors). • Employee retention (27 percent of small employers without retirement plans reported that most of their full-time employees stay with the company less than three years, compared with 8 percent of plan sponsors. Eighty-six percent of plan sponsors report that most of their full-time employees stay with them for three or more years, compared with 69 percent of nonsponsors). The SERS found that the potential exists for increased plan sponsorship among small businesses: • Fifteen percent of small employers without a retirement plan reported that it is very likely that their business will start one for their employees in the next two years, and 24 percent said it is somewhat likely. • When asked to decide from a list of incentives what might motivate them to seriously consider offering a retirement plan, nonsponsors cited an increase in their business profits (69 percent); business tax credits (67 percent); a plan with reduced administrative requirements (55 percent); and allowing key executives to save more in the retirement plan (52 percent). Forty-six percent reported that demand from employees would lead to serious plan consideration, 44 percent said the availability of easy-to-understand information, and 33 percent said lengthening the vesting requirement. • Plan sponsors who took a seven-question, “true-false” Small Biz Retirement Quiz appear to be only slightly more knowledgeable about retirement plans than nonsponsors. Overall, knowledge levels are low among small employers regarding the specifics of sponsoring a plan. One explanation could be that small employers turn to outside parties to handle the details of establishing and running a plan once the decision is made to offer a plan. The Small Biz Retirement Quiz, as well as a number of interactive savings tools, are available to the public at the EBRI and ASEC Web sites: www.ebri.org and www.asec.org. • The survey also found that many nonsponsors are unaware of the retirement plan options available to them as potential plan sponsors, and specifically as small employers. Thirty-six percent of nonsponsors said they have never heard of SIMPLE plans (Savings Incentive Match Plan for Employees, created specifically for small businesses), and 46 percent of nonsponsors have never heard of Simplified Employee Pensions (SEPs). By comparison, 97 percent of nonsponsors have heard of 401(k) plans. The annual Small Employer Retirement Survey (SERS), now in its second year, was designed to gauge the views and attitudes of America's small employers (with five to 100 full-time workers) regarding retirement plans and related issues. The survey was conducted within the United States between January 4 and February 28, 1999, through 15-minute telephone interviews with 301 companies with a retirement plan and 301 com-panies without a retirement plan. Within each sample, quotas were established to ensure adequate representation by size of business. In theory, each sample of 301 yields a statistical precision of plus or minus 6 percentage points (with 95 percent certainty) of what the results would be if all businesses with five to 100 full-time workers were surveyed with complete accuracy. There are other possible sources of error in all surveys, however, that may be more serious than theoretical calculations of sampling error. These include refusals to be interviewed and other forms of non-response, the effects of question wording and question order, and screening. While attempts are made to minimize these factors, it is difficult or impossible to quantify the errors that may result from them. The 1999 SERS data collection was funded by grants from 9 public and private organizations, with staff time donated by EBRI, ASEC, and MGA. SERS materials and a list of underwriters may be accessed at the EBRI Web site: www.ebri.org/sers. In addition, full information on educating consumers and employers can be found at www.choosetosave.org. The SERS was co-sponsored by the Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC), and Mathew Greenwald & Associates, Inc. (MGA). Founded in 1978, EBRI's mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, DC. EBRI does not lobby and does not take positions on legislative proposals. ASEC is a coalition of private- and public-sector institutions that undertakes initiatives to raise public awareness about what is needed to ensure long-term personal financial independence. ASEC's goal is to make saving; investing; and planning for different life stages, including retirement, a vital concern of Americans. ASEC is part of the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF), a 501(c)(3) nonprofit, educational organization. MGA is a full-service market research and consulting firm in Washington, DC, that specializes in all aspects of survey research design and analysis, focus group and one-on-one qualitative research; new product development and testing; marketing, communications and advertising research; attitude tracking surveys; market segmentation; and database marketing and analysis.