Small Biz Owners Missing out

May 7, 2002 ( - A large number of small business owners don't appear to understand - or appreciate - all those retirement plan incentives contained in last year's pension reform law.

Over two-thirds of small plan sponsors – and 86% of small business owners, with between five and 100 workers, who don’t sponsor a retirement plan – say they are not familiar with the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) that was signed into law last year, according to the 2002 Small Employer Retirement Survey (SERS) sponsored by the Employee Benefit Research Institute (EBRI), the American Savings Education Council (ASEC) and Mathew Greenwald & Associates.

Unaware of Benefits

The 2002 SERS found that 87% of small-employer non-sponsors were unaware that the new tax law allows them to take a tax credit of up to 50% for the start-up costs of establishing and administering a new retirement plan – but when informed of the credit, 68% said it would make offering a retirement plan more attractive.  However, only 10% cited high administrative costs as an important reason for not offering these programs.

Still, 32% of respondents from companies without a retirement plan say they are likely to start offering a plan in the next two years, according to the survey.

Motivating Factors

As for what would motivate small employers who don’t currently offer a retirement program to do so, survey respondents noted:

  • an increase in the business’ profits, 71%
  • a plan with low administrative costs that required no employer contributions, 69%
  • business tax credits for starting a plan, 63%
  • a plan that could be tailored to the unique needs of their business, 59%
  • availability of easy-to-understand information, 56%
  • demand from employees, 56%
  • a plan with reduced administrative requirements, 53%
  • allowing key executives to accumulate more in retirement plan, 38%

The survey’s authors note that data from the US Department of Labor shows that while 64% of all employees in medium- and large-sized firms are covered by an employment-based retirement plan, only 34% of those at small firms are.

Blind Spots

The survey also found the other ‘blind spots’ regarding retirement plans by small employers:

  • employers are allowed to automatically enroll all employees in their 401(k) plans initially – 58% of sponsors, 62% of business owners were unaware of this,
  • employers sponsoring 401(k) plans are allowed to structure their contributions to eliminate the need to perform annual nondiscrimination testing – 58% of sponsors, 61% of business owners were not aware of this,
  • employees are not necessarily 100% vested in employer contributions – 56% of sponsors and 70% of business owners were unaware of this,
  • in some profit-sharing plans, employers do not need to make a contribution to the plan each year – 48% of sponsors and business owners were unaware.

Missed Conceptions

Cited by small employers as “most important” considerations in not offering a retirement plan:

  • workers prefer higher pay or other benefits, 22%
  • revenue is too uncertain to commit to sponsoring a retirement plan, 18%
  • a high percentage of workers are seasonal, part time, or have high turnover, 15%
  • required employer contributions are too expensive, 11%
  • it costs too much to set up and administer, 10%

On the other hand, the most important reasons small businesses offer a retirement plan include:

  • competitive advantage in recruiting/retaining workers, 30%
  • positive effect on employee attitude and performance, 23%
  • tax advantage for employees, 13%

Only 12% of the sample thinks that employers have an obligation to provide a retirement plan for employees.

The SER survey was conducted within the US between January and February, 2002, through 15-minute telephone interviews with 300 companies with a retirement plan and 300 companies without a retirement plan.