SBA Study: Retirement Plan Costs Loom Larger at Small Firms

August 19, 2005 ( - A new study sponsored by the US Small Business Administration (SBA) reveals a significant gap in what small employers have to pay for benefit programs than their larger counterparts.

An SBA news release said that, for example, per-participant administrative costs of defined-contribution pension plans are as much as 14 times more for the smallest firms.

Using data from the 1998 Form 5500s, the last time the form asked for the submitting employer’s size, researchers found that employers’ average contribution for defined benefit plans per participant is highest for the very smallest firms.

Firms with five or fewer workers make average payments totaling over $20,000 per participant into defined benefit plans while the largest firms with more than 5,000 employees are making the smallest average contribution per participant, $1,137. However, it seems likely that in smaller firms, those benefits are also flowing to the firm principals for the most part, rather than being spread across the wider beneficiary base of a larger concern.

Contributions, Defined

Meanwhile, the average employer contribution per participant for the defined contribution plans is $4,924 for the smallest companies (five or fewer employees). That amount decreases relatively steadily and levels off to an average contribution of $875 to $975 per participant for companies with more than 200 employees. The employees’ contributions show the opposite pattern, smallest for the smallest firm-size group at about $550 and then leveling off for the largest groups, ranging from $1,460 to $1,735 for all the firm-size groups above 200 employees, the research showed.

In terms of what kind of firms are offering particular types of pension programs, the SBA research found that the largest firms almost always have at least one of each kind and generally have several. Of 2,152 firms with more than 5,000 employees, 95% of them offered at least one type of defined contribution plan and 55% offered at least one type of defined benefit plan.

According to the research, in the smallest firm-size group (five employees or fewer), only about 10% offered at least one defined benefit plan, where 88% offered at least one type of defined contribution plan. In almost all firm-size groups the defined benefit plans were more likely to have a smaller number of employees than were the defined contribution plans. Among the smallest company size group, there were often one or two participants in the defined-benefit plans. Doctors, dentists, and other professionals frequently sponsored these arrangements.

Also, researchers found that in the largest firms, roughly three quarters of all employees have access to a retirement plan; while just 35% of employees in firms with less than five employees have access to a plan. In employers with less than five employees, 11% of employees have retirement program access.

Health Care Coverage

Other findings from the research included that:

  • 40% of employees in the smallest firms were eligible for health insurance coverage while slightly more than 77% of the largest firms’ employees were eligible for that benefit.
  • the weighted average cost of health insurance premiums per enrolled employee is relatively high for the very smallest firms (fewer than 10 employees), and drops as firm size increases (25-99 employees); it increases again for the largest employers (more than 1,000 employees).
  • in 2002, a smaller share of employees were eligible to enroll in businesses’ health insurance plans than in 1997, regardless of the size of the business

  • access to paid sick leave varied by firm size; over 81% of employees working for large firms reported having access to paid sick leave versus 65% for employees of small firms.
  • large firms pay more in leave benefits per employee than do small businesses, since a larger share of employees have access to leave benefits in big companies
  • paid vacation leave is the most frequently available benefit; access to pension plans is least common.
  • rates of access to paid vacation for both small and indeterminate size firms with more than 100 employees were similar to those in large businesses.

The SBA research report is here .