Congress Moves to Block Government-Sponsored Retirement Plans For Small Businesses
Smaller companies (fewer than 50 employees) are less likely to offer their workers a retirement plan according to statistics from the Bureau of Labor Statistics (BLS). In the under 50 employee segment, less than half of American workers have access to a retirement plan; and of those with access, only about a third participate in their company retirement plan.
Access to a company retirement plan and the participation rate increases commensurately with the size of the company. On the high end, companies with more than 500 workers show 90% access to a retirement plan with almost 75% participation rate.
In addition, those small companies that have adopted a retirement plan have faced a harsh reality of high costs and sub-par outcomes for participants (largely as a direct result of higher management and investment product costs). Small plans are not a well-serviced market.
The disparity in companies with retirement plans and those without has far-reaching and varied implications…mostly pointing to troubling trends for smaller companies and indicating future hardships for those without a plan. Most employers report their main reasons for not implementing a defined contribution plan such as a 401k are: the perceived high cost of start-up, not having the resources to maintain a plan, and employee apathy.
Some lawmakers have begun to introduce legislation that would force a state-run plan on companies with more than 5 workers into a government-sponsored IRA-type plan. However, the House of Representatives has passed legislation that would block such a move. The debate continues, but state-run/state-mandated plans are not favored by small business owners or by the current administration, it is unlikely that the government will be providing the solution any time soon.
However, there are companies now starting to cater to small plans under $10 Million in plan assets. Fisher Investments has been quietly focused on the under $10 million defined contribution (DC) marketplace for several years, providing low-cost, bundled solutions for small businesses in the $1-$5 million marketplace. Nathan Fisher, who heads the 401k Division at Fisher Investments, suggests that small business owners may be over-complicating the process, overestimating the costs and the resources required to secure and maintain DC plan for their employees.
“Small and mid-sized businesses often lack the internal staff to manage a 401(k) plan the way larger organizations do. When considering starting a new plan, owners and managers of smaller organizations may feel that hiring internal staff is unrealistic, and they may initially feel underwhelmed by the options available to them for outsourcing the administration of the plan”, says Fisher.
Mr. Fisher, whose company has a national footprint, feels that business owners may misinterpret their employee’s lack of desire (as also reported in the Pew research) to have a company-sponsored retirement plan. He attributes this perception by many small business owners to a general malaise of uncertainty and lack of suitable vendors willing to service their markets.
“However our research suggests that those small and mid-sized business which do not currently offer a retirement plan mainly want a retirement solution that is easy to setup and maintain from a provider they trust and have a good working relationship with”, says Fisher. “That is why we assign a dedicated Retirement Counselor to each and every client to ensure things go smoothly, the client knows exactly who to go to for help, and they get the personalized support they want. The cost issue really just means they want to pay no more than reasonable fees for a solution that is easy to setup and maintain, given their existing staff.”
If Fisher is right, and can unlock the keys to positive outcomes for participants at a reasonable price, it would be a breakthrough for small companies as well as millions of workers. It remains to be seen whether his company and others can be successful at the lower end of the marketplace. No national provider has yet accomplished this on a large scale.
