I remember the very first job I had that offered a 401(k) plan. It was the only job I ever held with a retirement plan in the benefits package. That says a lot, because I have worked for a dozen employers over my 40+ years in the workforce. For as long as I can remember, small businesses have struggled with retirement plans.
They continue to struggle in the aftermath of COVID. Small business owners around the country are struggling to hire and retain. But as the brokerage general agency BenefitMall explains, they know that employee benefits are key to their hiring success. That’s why BenefitMall encourages its brokers to always offer a few retirement plans. Yet it doesn’t change the fact that small business owners often find retirement plans elusive.
Businesses Can’t Afford It
Data from the recently released 2023 Small Business Retirement Index survey conducted by Fidelity makes it clear why small businesses struggle with the idea of offering retirement plans. The data may not match data from similar surveys done in the past, but we know that right now these are the main reasons small businesses don’t offer retirement plans:
- 48% say they cannot afford one
- 22% say there are more important things to focus on
- 21% say they don’t know how to go about offering a retirement plan.
The fact that the largest group of employers not offering retirement plans say it’s because they cannot afford to do so explains a lot. Small businesses have historically struggled to keep up with compensation expectations and still make their margins. As the cost of expected benefits (like health insurance) continues to increase, employers have less to put into retirement plans.
An Extra Cost of Doing Business
No matter how you cut it, a retirement plan is an extra cost of doing business. The entire financial burden of maintaining a plan falls on the employer. Worst of all, employers are expected to contribute to individual accounts as part of the benefit. They realize no direct return on their contributions. To them, retirement plans simply take money out of the operating budget.
Spending that extra money without getting anything in return isn’t necessarily a big deal when the economy is strong and a small business is doing well. But as soon as a little belt-tightening is necessary, a retirement plan becomes dead weight. Employers don’t look at it in terms of hiring and retention. They look at it purely as money being spent to keep paying employees after they stop working.
When Employers Do Offer Retirement Plans
None of this is to say that retirement plans are a bad idea. Retirement plans are neither good nor bad. They are nothing but a tool for planning one’s financial future. With that in mind, does the Fidelity survey reveal any of the motivations behind employers who do offer retirement plans? Absolutely.
Here are the top three reasons employers cite for offering a retirement benefit:
- It’s the right thing to do (63%)
- Employees want and expect it (53%)
- Retirement plans are an attractive incentive (51%).
You might be surprised that the majority of small business owners think offering a retirement plan is the right thing to do. That surprised me, given that I only worked for one employer who actually followed through. But believing it is the right thing to do and being able to afford to do it are two separate things.
Small businesses have long struggled with retirement plans. Most of the time, the issue is cost. They just don’t have the financial resources to offer something.