Forty-two million individuals work for small employers; 9 million are participating in an employment-based retirement plan, while 33 million are not participating in a plan. This Issue Brief examines the barriers that prevent small employers from sponsoring a retirement plan, their level of knowledge about plans, and changes that might lead to plan sponsorship. It also examines the motivations of small employers that sponsor retirement plans.
Small employers identify three main reasons for not offering a plan: employees' preferences for wages and/or other benefits, administrative costs, and uncertain revenue that makes it difficult to commit to a plan.
Small employers without plans report being familiar with 401(k) and profit-sharing plans, but little else. Forty-seven percent report never having heard of the savings incentive match plan for employees (SIMPLE), and
55 percent report never having heard of simplified employee pensions (SEPs).
There is apparent misunderstanding about retirement plans among small employers that do not sponsor one, especially with regard to costs. For example, 35 percent do not know that a plan can be set up for less than $2,000.
What changes would lead to serious consideration of retirement plan sponsorship? In order of reported importance: increased company profits (66 percent), a business tax credit (64 percent), reduced administrative requirements (50 percent), demand from employees (49 percent), allowing key executives to save more in the plan
(49 percent), and easing, i.e., lengthening, of vesting requirements (40 percent).
Many small employers that sponsor a retirement plan cite business reasons among their motivations. Sixty-eight percent cite a "positive effect on employee attitude and performance" as a major reason for offering a plan. Fifty-six percent cite a "competitive advantage in employee recruitment and retention" as a major reason. Small employers with a retirement plan report direct benefits from sponsorship, but many of those without plans appear unaware of these potential benefits.
The 1998 SERS indicates that effective public policy must educate workers regarding the need to make retirement planning and saving a priority, in addition to addressing employer concerns about offering plans. Furthermore, there is a need to educate small employers about the options available to them and what these options entail. Finally, it appears that many employers need to be informed of the potential benefits from plan sponsorship.
