Small Businesses Are Growing, But Will That Translate to More 401(k)s?

May is National Small Business Month, and small businesses seem to be faring pretty well both in terms of growth and hiring, according to recent reports.

On May 6, the CBIZ Small Business Employment Index recorded a 0.29% rise in hiring, continuing a three-month streak of uptick. The index monitors employment patterns for more than 3,000 companies with 300 or fewer employees.

On May 7, the Principal Financial Well-Being Index, which surveys business owners at companies with two to 10,000 employees, revealed small businesses are narrowing the growth disparity with large businesses. A year ago, large businesses reported growth at a rate 20 percentage points higher than small businesses, with 74% compared to 54%. This year the disparity has decreased to 12 percentage points, 73% versus 61%.

The strength of small businesses, combined with state mandates and federal incentives, should in turn help with increasing workplace retirement plan coverage, says Steve Rubino, head of retirement at J.P. Morgan Asset Management.

“Our small business clients tell us that offering a retirement plan is increasingly a fundamental part of attracting talent in a labor market that continues to be tight,” Rubino says.

He points to industry projections placing the number of new plans at up to 40,000 per year and 1 million in total 401(k) plans by 2030, up from what Cerrulli Associates estimates to be 668,419 plans at the end of 2022.

“New state mandates are a big driver of this growth,” Rubino says. “For example, new mandates are expected to gain momentum in states such as New York and New Jersey over the next year.”

Securing Growth

Rubino added that with the Setting Every Community Up for Retirement Enhancement Act of 2019  and SECURE 2.0, small businesses may be able to claim a tax credit of up to $5,000, for three years, which is a strong financial incentive. Additionally, new technology platforms that automate features, such as integration with payroll providers, are making things easier for small businesses starting their first 401(k) plan.

“From state-offered plans, to PEPs and MEPs, to standalone 401(k)s, small businesses also have an increasing range of options to meet their needs,” he says.

DJ Kurtze, senior vice president and Bay Area region president of Five Star Bank, echoed this sentiment, saying businesses are looking for every way to be more competitive as employers. He says this is especially true in the Bay Area, where the labor market is stronger than most of the country.

“401(k)s are viewed by many employees as very desired, if not a mandatory benefit, so it makes a lot of sense that most employers would be looking to add 401(k) plans if that is a current gap in their benefit offering,” Kurtze says.

Obstacles Remain

There are stumbling blocks that could hamper this growth. Rising costs from inflation in all industries, the perceived cost of establishing a new 401(k) plan from scratch, and lack of connection with experts in the 401(k) space can be some of the biggest obstacles for businesses setting up  a plan from scratch, according to Kurtze.

“It’s also the case that it seems not every 401(k) provider/adviser wants to support brand new plans and would rather compete for larger plans instead, leaving some smaller businesses behind in the space,” he says. “Having a direct connection with a banker you trust who can help point your business in the right direction is critical for small businesses.”