Employees’ retirement plans took a hit as the pandemic forced workers to focus on immediate financial concerns rather than long-term savings, but for some employees — particularly those working for small businesses — the idea of a financially secure retirement has never been a guarantee.
In the U.S., of the 5.8 million small businesses — those with 100 workers or less — 90% don’t offer their employees a 401(k), according to research from Guideline, a retirement savings platform for small businesses. Of the 42 million employees working for small businesses, 75% don’t have access to any retirement plan.
“There’s a systemic problem in the way in which our retirement savings vehicles have changed over the last 30 years,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings, a 401(k) provider for small businesses. “Pensions have gone away and 401(k)s have replaced them, but we didn’t educate people to know what it means to be a good saver, or to be able to make investments, or to be able to plan for your own personal financial future.”
This fundamental lack of education can lead small business owners to feel that they’re not able to help employees retire comfortably. Offering a full-blown 401(k) might be too much of an investment (and work) for a small business, Parks says, but there are other ways these employers can help employees secure a financially stable retirement.
Options include a payroll-deducted IRA, or a Savings Incentive Match Plan for Employees — also known as a SIMPLE IRA — which allows smaller employers and employees to contribute to a traditional IRA as a sort of startup retirement plan if the employer doesn’t offer a sponsored plan. Employers can also participate in a Pooled Employer Plan, a new type of retirement savings plan that was created through the SECURE Act. It allows employers of different sizes and across industries to work within a single plan that will take on the brunt of the administrative burden for the group of employers.
“It really depends on the employees’ savings needs and the amount of complexity or simplicity a business is looking for,” Parks says. “In all cases, if the business is in a state with a mandate, all these types of plans would satisfy that.”
As of December 2021, 14 states have enacted mandates that require employers to provide employees with retirement savings plans. In California, companies with five or more employees must offer a plan or face a fine of $250 per eligible employee; the fine doubles to $500 per employee after 180 days of noncompliance, according to Vestwell, a 401(k) platform. Other states, including New Jersey, have implemented similar requirements and fines for employers.
“A lot of states have started to take a look at the lack of retirement savings among small-business employees, and they know this is going to be a societal problem, because all these people are going to be underprepared for retirement, and then they’re going to start to pull on social services,” Parks says. “In 2022, more state mandates will come online, and you’re going to see [small businesses] finally start to move in that direction. Deferring a portion of a paycheck into a retirement account really is the most effective way to fund retirement.”