Sized Up: Firm Size and Plan Sponsorship Rates
Differences in workforce composition — not costs — appear to be a primary cause for the lower rate at which small employers sponsor retirement plans, according to a new report.
As a group, the characteristics of small-firm employees differ substantially from the characteristics of large-firm employees, according to a new report from the Investment Company Institute (ICI)
. Nevertheless, workers at small firms that sponsor plans are very similar to workers at large firms that sponsor plans, and workers at small firms that do not sponsor plans are very similar to workers at large firms that do not sponsor plans.“Demand” Notes
ICI notes that the fact that worker characteristics are related to the employer’s decision to sponsor a plan suggests that worker demand for retirement benefits plays a “key role” in determining which employers sponsor retirement plans. However, the report notes that the starkest difference in sponsorship across groups of workers is not related to a worker characteristic, but rather to a characteristic of the employer, specifically employer size as measured by the number of employees. Only 17% of workers at firms with fewer than 10 employees reported that their employer sponsored a retirement plan in 2013, compared with 71% at firms with 1,000 or more workers. However, if a firm sponsors a plan, approximately eight in 10 employees participate, regardless of firm size.
The report examines two potential alternate explanations for why small firms are less likely to sponsor retirement plans: First, that small firms incur higher per-employee administrative costs than large firms, and second, that small-firm employees do not value retirement benefits as highly as their counterparts in larger firms.
While acknowledging that both administrative costs and workforce composition are likely to influence an employer’s decision to sponsor a retirement plan, ICI says that the data suggest that the low sponsorship rate at small firms is more likely due to differences in demand for retirement benefits by the firms’ employees than to the fixed costs associated with starting up and administering a plan.Age, Income, Connection to Workforce
The report notes that, across all firm sizes, workers at firms that do not sponsor plans are younger: 29% of workers at firms without plans are 21 to 29 years of age, compared with 20% of workers at firms that offer plans. Moreover, 27% of employees at small firms that sponsor plans are in the lowest two quintiles of annual earnings ($27,000 or less), compared with 25% of employees at large firms that sponsor plans. Regardless of firm size, employees at firms that do not sponsor plans earn less: 59% of employees at small firms that do not sponsor plans and 53% of employees at large firms that do not sponsor plans are in the lowest two quintiles of annual earnings.
Additionally, firms that do not sponsor retirement plans also have higher proportions of part-time or part-year employees, according to the report. Of firms that sponsor plans, 76% of employees at firms with fewer than 50 employees are full-time, full-year workers, compared with around eight in 10 workers at other firms. Regardless of firm size, firms that do not offer plans have fewer full-time, full-year workers.
Of firms that do not sponsor plans, the smallest and largest firms have the lowest percentages of full-time, full-year workers: 59% of workers at firms with fewer than 50 employees; 66% of workers at firms with 50 to 99 employees; 65% of workers at firms with 100 to 999 employees; and 60% of workers at firms with 1,000 employees or more.