Why Don’t More Small Employers Offer Retirement Plans?

The nation’s retirement plan coverage gap is a large and growing concern, and — though some of the common wisdom about that gap is out of context — with reason.

Indeed, there are many pieces to solving that particular puzzle: part-time and/or part-year workers, who aren’t eligible in many plans; those beyond ERISA’s reach (too young, or too old); lower-income individuals who can’t, or don’t think they can, afford to participate. There are even self-employed individuals who simply haven’t gotten around to setting up their own retirement plan.

But what many of those individuals have in common is that they work for a small employer. Perhaps the simplest, and most effective, way to close the retirement plan coverage gap is to encourage small business owners to become plan sponsors. So, what’s standing in their way?

They’re worried about the cost.

Anyone who has ever worried about making a payroll can appreciate the concerns about adding costs to your bottom line – particularly costs that are (or at least seem to be at the outset) unknown, variable, and ongoing.

Of course, a lot of what makes those costs variable is within the control of the employer, even if they don’t understand that at the outset. And there ARE some tax benefits that can offset those costs. That said, these are things that your average first time potential plan sponsor needs help understanding.

They’re worried about the liability.

For years, well-meaning advisors and providers have touted the value they bring to the table by focusing on all the liabilities employers could be subject to without their services/counsel. That, coupled with the seemingly relentless headlines about employers being sued by their participants (never mind that those plans tend to be much, much larger, and different than your typical small business retirement plan), and you can hardly blame an already hesitant employer for putting off the potential risks associated with embracing the responsibility of an ERISA fiduciary.

The liability issues notwithstanding, ERISA’s authors knew that the organizations that established these plans wouldn’t all be experts — and acknowledged that those who lacked the expertise not only could, but would be expected to, engage the services of experts to help them fulfill those responsibilities.

They don’t think their workers want them.

Among the more intriguing rationales offered by small businesses for not offering a workplace retirement plan was one put forth in an now somewhat admittedly dated (2003) Small Employer Retirement Survey by the nonpartisan Employee Benefit Research Institute (EBRI) — that their employees are “not interested” in having a retirement plan. And I have actually had plan sponsors say to me in response to my inquiries about plan adoption, “nobody has ever asked about a 401(k).” And perhaps they haven’t — after all, particularly in a soft economy, workers are probably more concerned about their paycheck, and perhaps health care. And they may just be glad to have a paying job, and don’t want to rock the boat by pressing for benefits beyond that of a paycheck.

But if they had an opportunity to participate, would they? A report by the Government Accountability Office (GAO) found that the vast majority of workers who do not participate in a workplace retirement plan — 84% — reported they did not have access to a workplace retirement program. Of two key access factors — the employer must offer a program, and the worker must be eligible to participate — the GAO found that the lack of access was primarily due to employers not offering a retirement program (68% reported they worked for an employer that did not offer a program, while another 16% reported they were not eligible for the program their employer offered). Actually, the GAO found that workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms.

So, while their workers may not have broached the subject, it’s likely on their minds, and the data suggest that they would take advantage if it were offered.

They don’t know how to start.

Let’s face it –— small employers are, in many cases, only a year or two beyond the “garage” phase. The owner may have had a 401(k) at their previous employment, or may not — but even if they had one, they probably didn’t have any idea where it came from, how it got started or what it takes to set one up.

Recognizing that aspect, at least two states (Washington and New Jersey) are in the process of establishing online marketplaces where small employers can shop for retirement plan providers. That might help, of course — but there’s a reason that it’s said that small plans are sold, and not bought.

Ultimately, small business owners have their hands full dealing with the things in which they have expertise. When it comes to retirement plans, employers are generally better off getting help from those who have that expertise.