Small Firms May Be Making Premature Decision Not To Offer A Retirement Plan

April 4, 2000
Danny Devine
(202) 775-6308
devine@ebri.org, EBRI
Variny Paladino, ASEC
(202) 775-6321
paladino@asec.org, EBRI

WASHINGTON, DC—Are small businesses saying “no” to a retirement plan for their employees before knowing all the facts? According to the results of the 2000 Small Employer Retirement Survey (SERS) released today, nonsponsors may not be aware of all the options available to them, or of the potential business advantages of offering a plan. Currently, less than half (46 percent) of full-time employees at small private establishments (100 or fewer workers) are participating in an employment-based retirement plan.

The 2000 SERS, released today by the nonpartisan Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC), and Mathew Greenwald & Associates (MGA), shows that many small business owners without retirement plans are unfamiliar with the different retirement plan types available to them as potential plan sponsors. In particular, they lack familiarity with the options created specifically for small employers and designed to be less costly to establish and administer. One-third (33 percent) of nonsponsors say they have never heard of the savings incentive match plan for employees (SIMPLE), and 54 percent of nonsponsors report that they have never heard of simplified employee pensions (SEPs). By comparison, very few nonsponsors say they have never heard of or are not too familiar with 401(k) plans.

(The savings incentive match plan for employees (SIMPLE) was created by the Small Business Job Protection Act of 1996 to give small businesses (100 or fewer employees) the ability to offer a simplified retirement plan to their employees. A SIMPLE plan can be either an individual retirement account (IRA) for each employee or a 401(k) plan. SEPs were created in the Revenue Act of 1978 in order to relieve small businesses of the potential burdens associated with administering qualified retirement plans.

In addition, there are potential business benefits from plan sponsorship that nonsponsors simply may not be aware of, and therefore do not factor into their thinking before making a decision. Among small employers that do sponsor a retirement plan, 47 percent report that plan sponsorship has had a major impact on their ability to hire and retain good employees (an additional 40 percent report a minor impact). One-third (34 percent) of small plan sponsors report that plan sponsorship has had a major impact on employee attitude and performance (an additional 49 percent report a minor impact).

By comparison, only 11 percent of nonsponsors report that not offering a retirement plan has had a major impact on their ability to hire and retain good employees (58 percent report no impact at all) and 6 percent report that not offering a plan has had a major impact on employee attitude and performance (67 percent report no impact at all). It is likely that even with plan sponsorship, these positive impacts would not exist for some of these employers. However, it is also possible that some of these employers may simply be unaware of the potential business benefits of plan sponsorship.

“Thirty-nine percent of small employers without plans say they are very or somewhat likely to start a plan in the next two years,” said Dallas L. Salisbury, president and CEO of EBRI. “If other small employers can be made aware of their available plan options and the potential benefits of plan sponsorship, this number could rise.”

Highlights From the Survey

Major reasons why small employers do not offer a retirement plan:

  • Employees prefer wages and/or other benefits (21 percent cite this as the most important reason).
  • A large portion of workers are seasonal, part-time, or high-turnover (18 percent cite this as the most important reason).
  • Revenue is uncertain (13 percent of nonsponsors rate this as the most important reason).
  • The business is too new (11 percent of nonsponsors say this is the most important reason).

Small companies that sponsor retirement plans tend to be distinctly different from small employers without plans. Nonsponsor companies tend to have lower revenue and employees who are younger, earn lower salaries, have less formal education, and remain with the company for less time. Retirement planning may not be a priority among these workers, so their employers apparently are less inclined to offer a plan. Key factors that characterize small firms without retirement plans include:

Lower company revenue (2 percent of small employers without retirement plans report annual gross revenue of $5 million or more, compared with 22 percent of small employers that do sponsor a retirement plan).

  • Younger workers (27 percent of plan nonsponsors report that most of their employees are under age 30, compared with 15 percent of plan sponsors).
  • Lower salaries (34 percent of nonsponsors report that most of their full-time workers earned less than $20,000 annually, compared with 9 percent of plan sponsors).
  • Less education (55 percent of nonsponsors report that most of their full-time employees have a high school education or less, compared with 38 percent of plan sponsors. Twenty-seven percent of plan sponsors report that most of their full-time employees have a college degree, compared with 11 percent of nonsponsors).
  • Lower employee retention (34 percent of small employers without retirement plans reported that most of their full-time employees stay with the company less than three years, compared with 13 percent of plan sponsors).

The SERS finds that the potential exists for increased plan sponsorship among small businesses:

  • When asked to decide from a list of incentives what might motivate them to seriously consider offering a retirement plan, nonsponsors cite an increase in their business profits (69 percent); business tax credits (65 percent); a plan with reduced administrative requirements (52 percent); and availability of easy-to-understand information (50 percent). Forty-nine percent report that demand from employees would lead to serious plan consideration, 35 percent say allowing key executives to save more in a retirement plan, and 27 percent say lengthening the vesting requirement for employees.

Based on the SERS results, long-term efforts to increase coverage among small employers should include:

  • Educating small employers about the retirement plan options available to them and the potential business benefits of plan sponsorship.
  • Educating workers so that they view saving and retirement planning as a personal priority and communicate their desire for a retirement plan to their employer.
  • Ongoing good economic conditions so that business profits and the affordability of plan sponsorship improves.
  • Policy changes such as simplification and tax credits that help make plans more affordable.

“A small business is more apt to offer a retirement plan once it reaches a certain level of profitability and stability,” said Don Blandin, president of ASEC. “And once retirement planning and saving are a priority for the employer's workers, then the new vehicles created specifically for small businesses will begin to realize their full potential.”

NOTE: Employers can take the Small Biz Retirement Quiz to test their knowledge on the specifics of sponsoring a plan. The Quiz and other interactive savings tools are available on the EBRI and ASEC Web sites at: www.ebri.org and www.asec.org

The annual Small Employer Retirement Survey (SERS), now in its third year, was designed to gauge the views and attitudes of America's small employers (with five to 100 full-time workers) regarding retirement plans and related issues. The survey was conducted within the United States between Jan. 3 and Feb. 4, 2000, through 15-minute telephone interviews with 300 companies with a retirement plan and 300 companies without a retirement plan. Within each sample, quotas were established to ensure adequate representation by size of business.

In theory, each sample of 300 yields a statistical precision of plus or minus 6 percentage points (with 95 percent certainty) of what the results would be if all businesses with five to 100 full-time workers were surveyed with complete accuracy. There are other possible sources of error in all surveys, however, that may be more serious than theoretical calculations of sampling error. These include refusals to be interviewed and other forms of nonresponse, the effects of question wording and question order, and screening. While attempts are made to minimize these factors, it is difficult or impossible to quantify the errors that may result from them.

Founded in 1978, EBRI's mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, DC. EBRI does not lobby and does not take positions on legislative proposals.

ASEC is a coalition of private- and public-sector institutions that undertakes initiatives to raise public awareness about what is needed to ensure long-term personal financial independence. ASEC's goal is to make saving; investing; and planning for different life stages, including retirement, a vital concern of Americans. ASEC is part of the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF), a 501(c)(3) nonprofit, educational organization.

MGA is a full-service market research and consulting firm located in Washington, DC, that specializes in all aspects of survey research design and analysis; focus group and one-on-one qualitative research; new product development and testing; marketing, communications and advertising research; attitude tracking surveys; market segmentation; and database marketing and analysis.

The 2000 SERS data collection was funded by grants from 10 organizations, with staff time donated by EBRI, ASEC, and MGA. SERS materials and a list of underwriters may be accessed at the EBRI Web site: www.ebri.org/sers

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