Introduction Conclusion Summary As of 1993, the latest year for which nationally representative data are available, 64 percent of all civilian As Congress considers various proposals to promote retirement plan coverage among small employers, expecta- nonagricultural wage and salary workers worked for an employer that sponsored a retirement plan, and tions should be kept realistic. Coverage rates among small employers are unlikely ever to approach those of large • The most notable gap in employment-based retirement plan coverage occurs among small 49 percent of all workers participated in a retirement plan sponsored by their employer.1 Probably the most employers simply because of the financial reality of small and uncertain profits faced by many small businesses, employers. Typically, the smaller the employer, the less likely the employer is to sponsor a notable gap in employment-based retirement plan coverage is among small employers. While 85 percent of work- combined with what is currently a weak interest in contributing to a retirement plan among many young and low- plan. Likewise, workers at smaller employers are less likely to participate in an employ- EBRI ers at employers with 100 or more employees have an employer that sponsors a plan, only 50 percent of workers at earning workers. These realities mean that is not enough simply to target the small employer, but it is also ment-based retirement plan. Coverage rates over time have remained basically unchanged employers with 25 to 99 workers, and 20 percent of workers at employers with fewer than 25 employees have an important to target employees with messages regarding EMPLOY the need EE to plan and save for their retirement. among small employers. employer that sponsors a plan. The findings regarding participation are similar. Two-thirds of workers at employ- BENEFIT ers with 100 or more employees actually participate in an employment-based retirement plan, compared with Endnotes RESF_ARCII T-110 36 percent of workers at employers with 25 to 99 workers and 15 percent of those at employers with fewer than INSTITUTE ,,_ • Chief among the reasons highlighted as to why small employers do not sponsor a retirement 25 workers. t Thesefigures are Employee Benefit Research Institute tabulations of the 1993 Current Population Survey plan are financial cost/lack of affordability and the burden of administering a plan, with the employee benefits supplement. latter often contributing to the former. Other factors cited were the lack of need for a plan Why the Gap? 2 Survey and results a preference were based among on responses employees from for 26 firms cash , including compensation. two-thirdsMany of theemployers largest 25 mutual noted fund that firms. they The survey had a objective high turnover was to quantify work force the number and therefore of SIMPLEtheir plans employees and accountswould that were not established be interested between in a Why do sponsorship rates and participation rates lag so much among small employers? EBRI first examined this January 1 and July 31, 1997, among members of ICI's pension committee. plan with vesting requirements. issue 10 years ago in a book entitled Pension Policy and Small Employers: At What Price Coverage? Chief among "Promoting Retirement Plan Coverage Among Small Employers" the reasons highlighted as to why small employers do not sponsor a retirement plan were financial cost/lack of 3 Given the limited nature of the sample, these figures likely undercount significantly the total number of affordability and the burden of administering a plan, with the latter often contributing to the former. Other factors SIMPLE • Research plans established in this area during has this indicated time period. that improved business profitability, increased tax ad- cited were the lack of need for a plan and a preference among employees for cash compensation. Many employers vantages, and increased employee demand may lead small employers without a plan to start noted 4 The that survey they used had"a accounts high turnover established work per force employer and therefore plan" as their a proxy employees for employer would not size,be which interested likely in understates a plan one. the average size of each employer to some degree. with vesting requirements. W They ays also and felt M that eans retirement Subcommi income tteewas at best on O a v remote ersight goal for the young workers who often make up their work force. Finally, small employers expressed a preference to reward performance selectively • The Small by paying Business bonuses. Job What Protection developments Act would of 1996 leadcreated small employers the Savings to startIncentive a plan? The Match same research Plan for Hearing on Pension Issues indicated that improved business profitability, increased tax advantages, and increased employee demand may Employees (SIMPLE), a simplified retirement plan for small businesses. SIMPLE plans can lead small employers without a plan to start one. either be an individual retirement account (IRA) or part of a 401(k) plan. These plans have Coverage rates have remained basically unchanged among small employers over time. A list of likely proven popular, as employers have established SIMPLE plans in greater numbers than most reasons for not having a plan would look pretty much the same: cost/administrative burden, low/uncertain profits, by in the retirement community anticipated. The plans have proven especially popular among and lack of demand on the part of workers at small employers would likely lead the list. However, because of a Paul J. Yakoboski, Ph.D. smaller employers with fewer than 10 employees, with a preference shown for the SIMPLE- lack of recent research in this area, EBRI, ASEC, and Mathew Greenwald and Associates have expanded the 1998 Senior Research Associate IRA. Retirement Confidence Survey project to include a survey of small businesses, both those with a retirement plan and those without one. The survey will explore the reasons that small employers do not offer a retirement plan and the changes that would lead them to consider doing so. Among small employers that do offer a retirement • As Congress considers various proposals to promote retirement plan coverage among small Employee Benefit Research Institute plan, the survey will explore the types of plans they offer and their motivations in offering these plans. Results employers, expectations should be kept realistic. Coverage rates among small employers are should become available in May, and EBRI would be happy to share them with the committee when available. 2121 K Street NW, Suite 600 unlikely ever to approach those of large employers simply because of the financial reality Washington, DC 20037 that many small businesses face small and uncertain profits, combined with what is cur- Recent Developments Voice: 202/775-6300 rently a weak interest in contributing to a retirement plan among many young and low- Fax: 202/775-6312 The Small Business Job Protection Act of 1996 created a simplified retirement plan for small business called the earning workers. These realities mean that it is not enough simply to target the small em- Internet: http://www.ebri.org savings incentive match plan for employees (SIMPLE). SIMPLE plans can be adopted by employers who employ ployer, but it is also important to target employees with messages regarding the need to plan 100 or fewer employees on any day during the year and who do not maintain another employment-based retire- and save for their retirement. ment plan. A SIMPLE plan can be either an individual retirement account (IRA) for each employee or part of a 401(k) plan. If established in IRA form, a SIMPLE plan is not subject to the nondiscrimination rules generally applicable to qualified plans (including the top-heavy Held rules), Tuesd and ay, simplified Marchreporting 10, 1998 requirements apply. Within limits, contributions to a SIMPLE plan are not taxable until withdrawn. A SIMPLE plan can also be adopted as part ofa 401(k) plan. In that case, the plan does not have to satisfy the special nondiscrimination tests applicable to 401(k) plans and is not subject to the top-heavy rules. The other qualified plan rules continue to apply. Small employers have established SIMPLE plans in greater numbers than most in the retirement commu- nity anticipated. Although no nationally representative data are yet available, a non-random survey by the r . • 2 - • • In_ estment Company Institute (ICI) of Its members indicates that plan estabhshment has been concentrated among employers with under 10 employees and that the SIMPLE-IRA is preferred over the SIMPLE-401(k). More specifically, the survey found that 18,261 SIMPLE IRA plans, with 95,431 participants, had been established, and 42 SIMPLE 401(k) plans, with 785 participants, had been established. 3 Eighty-seven percent of SIMPLE plans were established by employers with 10 or fewer employees, and 97 percent of employers establishing a SIMPLE plan had 25 or fewer employees. 4 Congress is now considering proposals by the Clinton Administration and others to create a "simple" version of a defined benefit plan for small employers. Creation of such a plan would mean that small employers interested in establishing a retirement plan via the "simple" route would no longer be restricted to choosing a defined contribution plan. Other proposals being considered to promote retirement plan coverage among small The views expressed in this statement are solely those of the author and should not be attributed to the employers include a tax credit for businesses establishing a new plan. Employee Benefit Research Institute, or the EBRI Education and Research Fund, its officers, trustees, sponsors, or other staff, or to the EBRI-ERF American Savings Education Council. The Employee Benefit Research Institute is a nonprofit, nonpartisan, public policy research organization which does not lobby or take positions on legislative proposals.