Tax Adjustments May Drive Small Businesses into 401(K) Space

Only 68% of small businesses with 100 or fewer employees offer a retirement plan of any kind, according to a new survey by LPL Financial. This data is consistent with other research such as the Social Security Bulletin which noted that only 52% of small businesses offered a plan.

These statistics suggest a significant amount of Americans may be vulnerable to riding out a financially troublesome retirement, if at all. According to the National Retirement Risk Index, 52% of households are at risk of not being able to meet their current standard of living in retirement. Considering the uncertainty of Social Security benefits and the shrinking landscape of defined benefit (DB) plans, these reports should raise significant concern among stakeholders in the retirement-planning industry.

However, LPL suggests that minor adjustments to the tax code, many of which are being proposed by lawmakers today, could encourage several employers to play a role in the retirement readiness of their employees.

For example, the survey found that 91% of small employers without a plan would be at least somewhat more likely to start a plan if the cap on the current tax credit for starting a plan were increased to $5,000 (as under several bipartisan legislative proposals) and adjusted to cover all initial costs, and 50% are much more likely.

Similar adjustments may also push employers who already offer plans to take advantage of auto features, which have played significant roles in boosting participation and savings rates in recent years.

The survey found that only 53% of small businesses that offer plans take advantage of automatic enrollment. The firm points to behavioral science research which suggests that employees of companies that use auto features have shown “a marked increase in the amount of money saved.” These include automatically enrolling employees in the retirement plan, automatically selecting investments, and automatically increasing the amount of employee contributions each year.

Among reasons why small-business owners didn’t use auto enrollment, the top sentiments were cost (41%), a concern that employees would be upset (35%), and complexity or unawareness of the feature (24%).

However, 86% of respondents said they would be at least somewhat more likely to offer auto enrollment if they were eligible for a $500 credit.

By offering a retirement plan and taking advantage of auto features, small business owners could play a significant role in guiding a substantial portion of the American workforce into a comfortable retirement.

In fact, small businesses employ a large chunk of working Americans. Small businesses account for 60% of new jobs created since the financial crisis, according to the Small Business Administration. Furthermore, recent Census data suggests small businesses cover 48% of the private sector. However, employers would also need to take a proactive approach to educating their employees about the benefits of increasing contributions, investing and saving for retirement. The survey found that among the top reasons employers did not automatically enroll their employees into 401(k) plans was a fear that their workers would be upset.

LPL concludes “Given the large footprint of small business on the American economy, a relatively small outlay for improved tax incentive could go a long way toward improving the retirement security of a large number of Americans.”

“The Small Business Retirement Savings Challenge by LPL Financial” can be found at lplfinancial.lpl.com