Soft Economy Stalls Small Biz Retirement Plan Starts

June 4, 2003 ( - The uncertain economic environment has claimed another casualty - small business retirement plans.

While smaller employers have been a well-regarded engine of growth for the 401(k) industry over the past several years, a whopping 43% of those without retirement plans already in place say they are not at all likely to offer one in the next two years, according to the sixth annual Small Employer Retirement Confidence Survey (SERS) released today by the Employee Benefit Research Institute (EBRI), American Savings Education Council (ASEC), and Mathew Greenwald & Associates. In 1998, only 32% were so strongly opposed to doing so.

“Likely” Candidates

Among respondents to the 2003 SERS, just 7% of those who aren’t currently offering a plan say they are very likely to do so in the next two years (versus 17% in 1998), while another 22% say they are somewhat likely to start a plan.

As for what would spur these non-plan sponsors to change their status, more than a third (34%) cited an increase in business profits – a change that would influence 39% to be somewhat more likely to offer a plan. Indeed, more than a quarter (27%) of nonsponsors say they do not offer a plan because of low or uncertain revenue. Also cited as factors that would make a plan offering much more likely were:

  • 30% – a plan that requires no employer contributions
  • 23% – increased business tax credits for starting a plan
  • 20% – a plan with reduced administrative requirements
  • 20% – availability of easy-to-understand information
  • 18% – greater tax advantage for key executives

Just 15% said increased demand from employees would render a decision to offer a plan “much more likely”, though 40% said it would then be “somewhat more likely.”

Not surprisingly, those who are very likely to offer a plan in the near term were much more likely to believe that a retirement plan offers their business a competitive advantage in employee recruitment and retention and in motivating employees.

Plan Profiles

The survey’s authors note that while 58.1% of full-time employees in medium- and large-sized firms participate in an employment-based retirement plan, just 28.8% of full-time employees at smaller firms (99 or fewer workers) do. The survey found that smaller employers without retirement plans tend to have revenues of less than $2 million (70%), tend to be family-owned businesses (61%), and nearly two-thirds (66%) have been in business for at least a decade.

There is a knowledge gap among nonplansponsors as well. Nearly half (47%) have never heard of Simplified Employer Pensions (SEP), while another 26% have heard of them, but are “not too familiar” with the programs. Thirty-seven percent have never heard of a traditional pension plan, and nearly a third (32%) are clueless about Savings Incentive Match Plan for Employees (SIMPLE). Just 2% say they have never heard of a 401(k) – and 46% say they are “very familiar” with those plans.

Most (82%) know that employers don’t have to allow employees eligible for 401(k) participation immediately, but only 54% know that workers are not always immediately vested in employer contributions, just 53% know that employers can structure those programs so that the only employer contributions required are matching contributions, and only 52% know that in some profit-sharing plans a contribution is not required every year.

The 2003 SERS is a survey of 300 small employers (those with 5 to 100 full-time workers) without a retirement plan, and 31 that have had one in place for less than a year.