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The Sorry State of Small Business Retirement Plans

A new study shows disturbing differences between savings plans at large and small companies. Here's what workers at the tinier firms should do.

By Richard Eisenberg

Workers of the small-business world: I’m worried about you. In particular, I’m worried about your retirement.
A bruising new study from the Transamerica Center for Retirement Studies tells a tale of two retirement systems in the U.S. workplace: one for employees at large companies and an inferior one for those at small firms.
If you work for a business with fewer than 100 employees, there’s a far greater burden on you for even the prospect of having a comfortable retirement.
(MORE: Danger: Retirement Hazards Ahead)

The Burden on Small Business Employees

“Workers at small companies need to be even more savvy about their retirement benefits than those at large companies, given the lag of those benefits at small companies,” Catherine Collinson, president of the Transamerica Center and author of the report told me. “It’s incumbent on small-company workers to help bridge those gaps on their own.”
Let’s put aside for the moment the fact that small businesses are less likely to offer retirement plans than large corporations; 71 percent of firms with 10 to 99 employees do vs. 95 percent of firms with 500 or more workers, according to the report ("The Retirement Readiness Imperative: Overcoming the Challenges Faced by Small Companies").

And when the U.S. Government Accountability Office recently studied the state of small-business retirement plans including firms with fewer than 10 employees, it found that just 14 percent provide them. Worse, a puny 5 percent of employers with one to four workers had such savings programs.
“As much as many small-business owners probably want to add a retirement plan, it is probably just another cost that they would worry about in this type of economy,” says Cindy Hounsell, president of the Women’s Institute for a Secure Retirement (WISER).
How Small and Big Plans Differ

What Collinson and her report are saying is that when small businesses do let employees save through company-sponsored retirement plans, the features they offer are lousier.

A few examples (when I cite “small companies” below I’m referring to those with 10 to 99 employees):
Only 18 percent of small companies have automatic enrollment. That feature, available at 43 percent of large corporations, forces employees to save through payroll deductions unless they opt out.
(MORE: How to Choose the Right Small Business Retirement Plan)

Just 46 percent of small companies offer target date or lifecycle funds. These “set it and forget it” types of funds, provided by 79 percent of big firms, give staffers broad diversification based on their age. Collinson calls this “an elegant, convenient approach to investing.”
About 70 percent of small companies match employee contributions. By contrast, that valuable perk is part of the retirement plan at 86 percent of large companies.
The Education Gap for Employees

And small companies are far less helpful in educating employees about retirement. 

Nearly all (95 percent) large firms provide online retirement tools and resources, compared to 69 percent of smaller operations. “It’s disappointing,” says Collinson.
Similarly, nearly half (44 percent) of large companies host pre-retirement seminars; just 18 percent of small firms arrange that kind of orientation.
Things don’t get any better when employees near retirement. An embarrassingly low 64 percent of small companies provide information about their plans’ distribution options; 87 percent of large companies make that information readily available.
(MORE: The Irrational Retirement Choices We Make)


What’s more, says Collinson, “our report found that if small companies aren’t offering a retirement plan feature now, very few say they’re likely to do so in the future.”
What Small Business Owners Say

In their defense, small-business owners often point out that retirement plans are expensive and complicated to adminster because of government regulations that could expose employers to liabilities if things go wrong.
Collinson isn’t buying it.
Ever since the Pension Protection Act of 2006 laid out rules for employers, she says, “many new features in the marketplace have become more competitive and efficient. Things that may have seemed costly or complex in the past are less expensive and less complex now.”
Advice for Small Business Employees

So given these disturbing disparities, what’s a small business employee to do? As the Government Accountability Office’s study said: “For workers at small employers, building an adequate level of income for retirement is becoming increasingly challenging.”
My advice: Take the initiative to secure your retirement.
If your employer doesn’t offer a retirement plan, “find a way to save on your own through a traditional IRA or another means,” says Collinson. The IRA contribution limit for 2013 is $5,500 if you're under 50 and $6,500 if you're over 50.

When your company has a plan but doesn’t provide auto enrollment, get proactive and sign up to save as much as you can. (Just be sure you've already built up an emergency savings fund elsewhere.) In 2013, employees under 50 are allowed to invest up to $17,500 in 401(k) plans; those 50 or older can put in as much as $23,000. Those figures won’t change in 2014.
If your company isn’t educating you and your small-business colleagues about making smart choices with your retirement plan, ask your boss to offer things like online tools and seminars.  
Based on the Transamerica report, your firm might not realize its employees are clamoring for such assistance.
Although 56 percent of small-company workers would like more advice from their employers on how to reach their retirement goals, just 42 percent of these-sized firms believe this to be the case, says Collinson.

Set them straight, small-business employees. Your retirement is in your hands.

Photograph of Richard Eisenberg
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More
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