Challenges Faced by Small Businesses in Offering Retirement Plans

When it comes to retirement plans, only about half of private sector workers in the United States have access to an employer-sponsored plan. This leaves many workers without adequate savings for their future.

Studies have consistently shown that the availability of retirement plans is closely tied to the size of the company. Larger firms are much more likely to offer retirement plans compared to smaller firms (see Figure 1).

Despite this trend, it's important not to overlook the fact that many small businesses do offer retirement plans. The real question is, why aren't more small firms taking this step?

While recent surveys have touched on the topic of small businesses and retirement plans, it has been over two decades since a comprehensive survey was conducted. Historically, small firms have mentioned three main barriers when it comes to offering retirement plans. These barriers include uncertain revenues that make it difficult to commit to a plan, employee preferences for immediate wages and other benefits, and the costs associated with setting up and managing a plan.

To gain insight into whether these barriers have changed over time, a study was conducted in collaboration with EBRI and Greenwald Research. The study involved interviews with 703 firms that had 100 or fewer employees, conducted between February and April 2023.

Figure 2 compares the responses of small businesses in 1998 and 2023. It confirms that the top two barriers preventing small firms from offering retirement plans -- revenue concerns/business size and costs or administrative burden -- remain significant challenges.

Overcoming Barriers to Workplace Retirement Plans for Small Businesses

Today, employers are no longer citing "employee prefers wages" as a major reason for not offering a retirement plan. Two main concerns, revenue stability/business size and cost/administrative burden, have emerged as major barriers.

Revenue Stability and Business Size

For many small firms, setting up a workplace retirement plan is not seen as a viable option due to concerns about revenue stability and business size. It is understandable that new businesses need to become established before considering such plans.

Cost and Administrative Burden Misperceptions

The second barrier, cost or administrative burden, is often driven by misperceptions. A quick Google search reveals that there are 401(k) options available with annual employer costs as low as $2,500 for a firm with 10 employees and $5,000 for a firm with 50 employees. However, over half of small firms believe that providing a retirement plan would cost more than $10,000 per year, and nearly 30% think it would cost more than $20,000 per year.

Tax Credits and Lower-cost Plan Options

Small firms often overestimate the cost of offering a retirement plan. What they may not realize is that they can claim a tax credit of up to $5,000 for three years to help offset the costs of starting a plan. This tax credit would make offering a plan more attractive for about 80% of employers surveyed.

Better awareness of lower-cost plan options and the availability of tax credits could help bridge the coverage gap and encourage more small businesses to offer retirement plans.