U.S. workers highly value their employer-provided retirement plans. For example, almost half (48 percent) of defined contribution (DC) plan participants surveyed by the Investment Company Institute said that they believe they would likely not be saving for retirement currently if they did not have access to a 401(k). Further, 84 percent of respondents reported that they believe their DC plans can help them meet their retirement goals, and 82 percent said that the unique tax treatment of these plans is a big incentive to contribute. Many employers also appear to recognize the value of their 401(k) offerings, as evidenced by a Transamerica Center for Retirement Studies poll which found that 75 percent of employers believe their workers view a 401(k) or similar plan as an important employee benefit.
Moreover, 69 percent of employer respondents said that they believe providing access to a 401(k) plan is necessary for attracting and retaining talent. With such responses it should not be too surprising that more and more of the businesses that were not offering their workers a DC plan have started to do so in recent years, and the fastest growth has occurred among smaller firms. A new Vanguard study, for instance, estimated that the number of small businesses offering their workers access to a 401(k) plan has surged by 526 percent since 2013 and resulted in a six-fold increase in the number of participants. That trend is encouraging since small businesses represent 99.7 percent of the employer firms in this country and are responsible for roughly half of all the private-sector jobs, according to the Small Business Administration. Despite the recent growth, many smaller companies still do not sponsor a 401(k) plan. For example, 90 percent of large firms (500+ employees) in the earlier-mentioned Transamerica study offered a 401(k) or similar employee-funded retirement plan while only 60 percent of small companies (5 to 99 employees) did the same.
Financial constraints and a lack of organizational resources are often the reasons why some smaller firms have yet to provide their workers with access to a 401(k) plan. Just look at a study by LPL Financial which found that of the surveyed small business owners that do not currently offer workers a 401(k) plan, 39 percent cited “cost” as a major hurdle, and 19 percent blamed “complexity.” Ninety-one percent of those same respondents, though, said that they would be at least somewhat more likely to begin sponsoring a 401(k) plan if the cap on the startup costs tax credit was increased and adjusted to cover all initial costs. Further, 86 percent of the surveyed small employers that do already offer a 401(k) plan said that they would be at least somewhat more likely to incorporate automatic enrollment into their plan design if they were eligible for a tax credit for doing so. Rather than waiting for lawmakers to provide such financial incentives, another option for small businesses that is already available is to take advantage of the efficiencies that are possible from joining a multiple employer plan (MEP).
Indeed, MEPs allow two or more employers to participate in employee benefit plans that are maintained as a single plan. This pooling of plan assets can lead to a significant reduction in the barriers to entry (costs) associated with offering a high quality defined contribution plan, and lower administrative burdens and reduced fiduciary responsibilities are possible as well. More information on the advantages of MEPs can be found here, and additional efficiencies are available by working with a professional employer organization (PEO). More than a quarter (26 percent) of the business owners in the Transamerica survey that expressed doubts about being able to sponsor a 401(k) or similar plan within the next two years said that they would consider joining a multiple employer plan offered by a vendor who handles many of the fiduciary and administrative duties at a reasonable cost. These employers will likely have a better time competing for talent than the firms that cannot offer workers retirement benefits as attractive as what can be found at big corporations.
Sources: ICI, TCRS, ThinkAdvisor, Vanguard, LPL FinancialPost author: Charles Couch