There is definitely a problem in the small business world. About 65% of all U.S. businesses are small businesses. Only 29% of those have retirement plans. The remaining 71% of small businesses offer no formalized way for employees or employers to save for the future, meaning they are dependent on Social Security and, at most, $5,000 per year saved in an IRA. That’s doing a huge disservice to those American workers who want to save and do the right thing.
A March 5, 2012 story in USA Today, “Legislation might help smaller firms offer retirement plans,” talked about how Congress wants to encourage small business owners to sponsor retirement plans through multi-employer savings pools. Small business owners interviewed in the story claimed “they want to offer their workers a retirement plan but obstacles are holding them back.”
As a financial advisor to many small business owners and employees, here’s my take.
We all know that without personal savings, usually accumulated though a workplace retirement plan, U.S. workers have little to no chance of successfully preparing for a financially comfortable retirement. Social Security, on its own, is woefully inadequate, and pensions are going the way of the dinosaur.
Furthermore, 78% of small business owners tell us they need to offer a retirement plan to attract and retain employees.
So what’s holding them back? The last thing small business owners need is another plan or program (sorry, Congress). The problem is that business owners don’t understand what’s already out there, because it’s too darn confusing.
So here are the facts. There are already several great retirement plan options — some totally free and without burdensome administrative rules — that can be offered by small business owners. The problem is that there is such a crazy-quilt of plans, all with different rules, contribution limits, penalties, and eligibility requirements, that most small business owners are paralyzed into non-action.
In fact, the USA Today article makes exactly that point (italics mine). “Different retirement plans are already available to small businesses, but many owners don’t know enough about them, retirement experts say. The perception is that they are more complicated and expensive than they really are, says Ken Hevert, vice president of personal retirement products at Fidelity Investments.”
So please, Congress, don’t make the situation worse. If you want to do something, please level the playing field for small business by equalizing contribution limits and harmonizing rules among plan types. (E.g. why let an employee contribute only $11,500 through a SIMPLE, a plan favored by small business, but $17,000 through a 401(k), a more expensive plan favored by larger corporations? That’s not fair.)
If you own or are employed by a small business, be aware that there is absolutely no excuse for not offering a retirement plan. The company can set up a retirement plan, often at no charge and with no administrative overhead, allowing employees to defer their own salary, and employers to make small contributions, all on a tax-deductible basis. Not only can you save, but you can cut your taxes to boot. Some plans, like a SIMPLE-IRA, can be set up at no charge, unlike a 401(k) which might cost $1,500 or so in annual maintenance and testing fees.
If you need help, start by talking with your financial advisor or tax preparer, or refer to the excellent small business resources you can find online at brokers like Charles Schwab, Fidelity or Vanguard.