As of 1995, there were 5.3 million
small-employer firms (100 or fewer employees) in the
United States. These small firms employed 38.0 million
individuals, representing 38 percent of all employment.
Therefore, low retirement plan coverage among small
employers directly affects a sizeable fraction of the
national work force.
There are a number of reasons why
more small employers do not offer retirement plans. Cost
and administration-related issues do matter, but for many
small employers these take a back seat to other issues.
For some, the main driver is the financial reality of
running a small business: Their revenue is too uncertain
to commit to a plan. For others, the most important
reasons for not sponsoring a plan are employee-related,
e.g., the workers do not consider retirement savings to
be a priority, or the employer's work force has such high
turnover that it does not make sense to sponsor a plan.
Many nonsponsors are unfamiliar
with the different retirement plan types available to
them as potential plan sponsors, especially the options
created specifically for small employers. For example,
most nonsponsors said they have never heard of (36
percent) or are not too familiar with (20 percent) SIMPLE
plans for small businesses.
Fifteen percent of small employers
report that they are very likely to start a plan in the
next two years, while 24 percent say this is somewhat
likely.
Nonsponsors report that the two
items most likely to lead to serious consideration of
sponsoring a plan are an increase in profits (69 percent)
and business tax credits for starting a retirement plan
(67 percent).
Major drivers of low retirement
plan sponsorship among small employers are who they
employ and the uncertainty of revenue flows. While issues
of administrative cost and burden matter, they are only
part of the puzzle. Therefore, the solution is not simply
“build it and they will come,” by creating
simpler and simpler retirement plans geared to small
businesses. Rather, it is build it and they will come
once the business reaches a certain level of
profitability and stability, and once retirement planning
and saving are more of a priority for the small
employer's workers.
