When it comes to funding the golden years of their employees, many small companies say they can’t afford it. But ignorance may be as real a barrier as cost.
More than a decade ago, the federal government created Simplified Employee Pensions, or SEPs, which helped small-business owners deal with the potential burden associated with administering qualified retirement plans.
Then in 1996, the Small Business Job Protection Act created a savings-incentive match plan for employees, dubbed Simple.
The plan, designed to be less costly for businesses with 100 or fewer employees, allows 100 percent immediate vesting on the employer’s contribution, unlike the 401(k) retirement plan.
But small businesses appear to be in the dark about their options. In a recent study by the Employee Benefit Research Institute, 54 percent of small companies that don’t offer retirement benefits said they had never heard of SEPs, and 33 percent gave a collective “huh?” when asked about savings-incentive match plans.
This lack of knowledge partially explains why small businesses lag behind big corporations when it comes to retirement benefits.
Only 46 percent of full-time employees in small companies have a retirement plan, compared with 79 percent of workers in large companies, according to the Bureau of Labor Statistics’ Employee Benefits Survey.
The low participation rates seem odd considering the booming economy and the bull market of the 1990s. But industry experts say traditional individual retirement accounts (IRAs) and 401(k) accounts have gotten most of the ink in personal-finance advertising and news articles.
The launch of the Roth IRA in 1998 stole most of the media thunder from the Simple, which became available the year before, said Jim McCarthy, senior vice president at Fidelity Investments, a unit of FMR Corp., the Boston-based mutual-fund company.
While cost and administration-related issues are factors, they aren’t the primary reasons small companies are sitting on the retirement-benefits sideline, according to the EBRI study. Lack of employee interest and high turnover of workers were more frequently cited by small companies as their rationale for not sponsoring a plan.
Additionally, several businesses said they were either too new or their revenue too uncertain for the company to offer retirement benefits.
Of course, these are many of the same companies complaining that attracting and retaining qualified workers is the biggest business problem they face.
“If employers knew more about their options, they might find administrative requirements are not as extensive as they think,” said Steven J. Rose, vice president for Nationwide Financial Services Inc., a retirement-plan provider, who co-sponsored the EBRI study. “Not only would sponsoring a plan help them attract and retain high-quality employees, but the tax benefits might also surprise them.”
The EBRI study also illuminated the difference in demographics between the small companies that sponsor retirementplans and those who don’t. Employees at companies without plans tend to be younger, have lower salaries, less formal education and remain with the company for less time.
Jere W. Glover, the chief counsel for advocacy at the Small Business Administration in Washington, said federal policy-makers are working to improve awareness. Glover noted earlier this year, a new regulation was added that allows small businesses for the first time to decide near the end of the year, instead of at the beginning, whether to fund their retirement plans. This change addresses the concern some businesses have that they may not have enough annual revenue to fund the benefit.
“We now have a variety of packages,” Glover said. “Assuming the business has money, there will be one (retirement plan) to meet their needs.”
In February, Complete Petmart Inc., a Dayton, Ohio, retailer, began offering a retirement plan that matches employees’ contributions with as much as 4 percent of pay.
“We have a very rich benefits package that runs from disability to eye care and dental, and we felt what was missing was a matching (retirement) plan,” said Kevin Manley, the company’s president and co-owner.
But “because of the youth of our work force, sometimes these things come across as esoteric,” Manley said. To get the word out about the new plan, the company has been holding employee-retirement seminars every 90 days in its stores.
