Cost, Complexity Main Obstacles to Plan Creation by Small Businesses, Survey Says

The survey also found limited awareness of SECURE 2.0.

A survey from Capital Group found that the primary obstacles to small businesses creating retirement plans were costs, complexity, and concerns about the size and stability of their business. The report also found that larger employers were much more informed about the SECURE 2.0 Act of 2022 and law’s impact on federal retirement policy.

Capital Group partnered with Escalent and surveyed 305 small businesses from May 18 to June 12 for the research. The businesses all had between four and 99 employees, between $250,000 and $100 million in revenue, and had been in business for three to 15 years.

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Obstacles to Plan Creation

Of the 305 employers, 105 offered a retirement plan and 200 did not. Three quarters of the businesses sampled that lacked a plan said they were interested in creating one, but only 13% considered it likely in the next six months.

The reasons employers gave for not offering a plan were mostly oriented around complexity and expense. Thirty-nine percent said their business was not large or stable enough, 35% cited limited administrative resources, 32% said they didn’t know where to start, and 32% said plan creation is too expensive for them, according to Capital Group’s findings.

Responses did vary according to business size. The smallest businesses, or those between four and 50 employees, were more likely to cite their business’s size and stability (39%) as a deterrent to plan creation. Companies with between 51 and 99 workers were more likely to cite administrative capacity (53%) as reason for not starting a plan.

In good news for urban and suburban small business employees who are interested in a plan, the survey found that 82% of urban employers without a plan and 76% of suburban employers with no plan considered it highly likely that they would offer a plan in the next two years. That compared to only 37% of rural employers not offering a plan that said the same.

Renee Grimm, senior vice president of retirement plans at Capital Group, says that many of these barriers to entry are “misperceptions.” She notes that there are other options for offering a retirement benefit besides 401(k) plans, such as SIMPLE 401(k) plans and auto-individual retirement account programs offered by many states.

Recruiting and Retention

High employee turnover was more of a concern for businesses with fewer than 50 workers (27%) than those with more than 50 employees (8%).

Grimm says that turnover is commonly cited in food service, for example, as a reason to not provide a plan, especially among wait and preparation staff. She notes, however, that food service managers tend to have lower turnover and a plan can be useful in recruiting and retaining talent at that level. She adds that if an employer “has unusually high turnover, many will never hit eligibility requirements” or vesting schedules, and this will reduce the cost to the employer. A plan is “still a mechanism to reward loyalty” in a high-turnover environment because it can incentivize many to stay longer.

Data from the survey suggests that many small businesses, especially those that lack a plan, do see retirement plans as a useful tool for recruitment and retention. Forty-four percent of those employers said it was a top-three reason to consider creating a plan, second only to “recognizing it’s a need for employees” at 46%.

Grimm says small businesses are having a “hard time finding good workers” and generally “are not attracting top talent.” She argues that they are “starting to see more of the value in attracting and retaining and is there no better vehicle than a qualified plan.”

SECURE 2.0

The survey also identified a large gulf in knowledge among small businesses as it relates to SECURE 2.0.

Ninety-one percent of employers with 51 to 99 employees said they were familiar with SECURE 2.0, compared with 57% of those with four to 50 workers. This gap persisted in both categories among employers with and without a plan, and awareness increased in both categories if the employer lacked a plan. Ninety-seven percent of employers with 51-99 employees that did not offer a plan said they were familiar with SECURE 2.0

Small businesses that offered a plan were most interested in learning more about SECURE 2.0 provisions that are trickier to implement administratively. These included increased catch-up contributions (39%), changes to emergency withdrawal rules (38%), and federal matching contributions for low-income employees, according to the report.

SECURE 2.0 will increase the catch-up limit for those aged 60-63 starting in 2025. It will also require highly-compensated employees to make catch-up contributions to a Roth, or after-tax, account starting in 2024, but the IRS postponed the enforcement of that provision until 2026. SECURE 2.0 also permits sponsors to accept self-certification for emergency withdrawals and makes the Saver’s Match a matching contribution instead of a tax credit.

Small businesses that did not offer a plan broadly had similar interests. Thirty-nine percent said penalty-free emergency withdrawals was a provision they wanted to learn more about and 36% said the same of the Saver’s Match.

Meanwhile, 40% said that they wanted to learn more about eligibility for part-time employees, suggesting that plan cost and participation may be of greater concern for small businesses.

SECURE 2.0 requires plans to make long-time part-timers with two or more years of service eligible for a plan if the employer offers one, starting after December 31, 2024.

CFA Institute-Led Group Publishes New Definitions for Responsible Investment

The new definitions aim to provide language for investors that allows them to communicate their responsible investment practices accurately and consistently, according to the CFA. 

In an effort to standardize terminology and enable institutional investors, regulators and industry participants to communicate with precision about environmental, social and governance investing and other responsible investing terminology, the CFA Institute recently published new definitions for sustainable finance-related terms.  

Margaret Franklin, CEO and president of the CFA Institute, said that this project is “critical to ensure that professionals can communicate efficiently and effectively with each other, as well as investors and industry professionals across the market.” 

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The definitions report was published as legal challenges continue to the Department of Labor’s rule permitting the consideration of ESG factors when selecting investments for defined contribution retirement plans, along with other conflicts at the state and federal over the role ESG in the proxy voting process and other systems. 

The CFA Institute collaborated with the Global Sustainable Investment Alliance and the Principles for Responsible Investment to harmonize definitions for the following responsible investment terms: 

  • Screening 
  • ESG integration 
  • Thematic investing  
  • Stewardship 
  • Impact investing 

Chris Fidler, head of industry codes and standards at the CFA, said in an emailed response to questions that well-defined terminology is essential for clear communication. 

“Unclear and inconsistent terminology can cause confusion in the marketplace, making it harder for both clients and investment managers to achieve their goals,” Fidler said. 

For this project, Fidler said the CFA selected commonly used terms that needed additional clarity and consistency. 

“We focused our efforts solely on terms associated with responsible investment approaches, but these are not the only sort of terms that cause confusion,” Fidler said. “Greenwashing, for example, is a frequently used term that does not have a precise and consistent definition.” 

Screening 

Screening is the process for determining which investments are or are not permitted in a portfolio. According to the CFA, this process is used for attaining an investment focus, complying with laws and regulations, satisfying investor preferences and limiting risk. 

The new definition for screening is “applying rules based on defined criteria that determine whether an investment is permissible.” The defined criteria can be qualitative or quantitative.  

For example, criteria can be whether the issuer or security in question is a constituent of a specific ESG-related index or whether a sovereign issuer achieves a given human rights performance score from a specific ratings provider. 

The CFA argued that if rules are not based on defined criteria and applied consistently, the activity should not be characterized as screening. 

ESG Integration 

ESG integration should be defined as the ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim to improve risk-adjusted returns, according to the CFA.  

This integration involves identifying and assessing the ESG risks and opportunities that are relevant to investments, weighing that information and making decisions about those investments. The CFA argued that this is an ongoing part of the investment process—not a one-time activity. 

Consideration of ESG factors, however, does not imply that there are restrictions on the investment universe and that ESG factors are given more or less consideration than other types of factors. 

“When communicating to general rather than professional audiences, investors should avoid the term ‘ESG integration’ and instead use plain language to accurately describe how ESG factors are considered in the investment process,” the CFA recommended in its report. 

Thematic Investing 

Thematic investing, according to the CFA, involves selecting assets to access specified trends. 

“Thematic investing is underpinned by the belief that economic, technological, demographic, cultural, political, environmental, social, and regulatory dynamics are key drivers of investment risk and return,” the report stated. 

This term essentially refers to selecting companies chosen in a top-down process for inclusion in an investment portfolio that fall under a sustainability-related theme, such as clean technology, sustainable agriculture, health care or climate change mitigation.  

The CFA noted that thematic investing differs from constructing a portfolio with a particular focus. For example, investors may wish to invest in a portfolio of a veteran-owned business because they want to support veterans while earning a financial return, but this would not be considered “thematic investing” unless a case was made for how veteran-owned business enable access to a specified trend or trends. 

“Thematic investing often—but not always—results in a focused portfolio, but not all focused portfolios are the result of thematic investing,” according to the report. 

Stewardship 

In the context of ESG, stewardship refers to “deliberate deployment of rights and influence (beyond capital allocation) to protect and advance the interests of those clients and beneficiaries.” This includes the common economic, social and environmental assets on which their interests depend. 

Some examples of ways in which investors can exercise their rights and influence include serving on or nominating directors to a company’s board, filing shareholder resolutions or statements and voting on proposals at shareholder meetings. 

The CFA argued that the term stewardship should not be used to refer to activities like proxy voting and engagement unless these actions are “undertaken to protect and enhance overall value for clients and beneficiaries.” 

Impact Investing 

Lastly, the CFA defined impact investing as investing with the intention to generate positive, measurable social and/or environmental impact alongside a financial return.  

Impact investing can be pursued across a range of asset classes, including fixed income, real assets, private equity and listed equity investments, according to the CFA.  

This concept differs from philanthropy in that it pursues a financial return in addition to a positive, measurable impact. Impact investors have discretion over the rate of return they target. 

Wilshire Advisors LLC also recently released a report arguing that while ESG stands for environmental, social and governance, “its meaning differs from individual to individual and from organization to organization.”  

The Wilshire report argued that ESG investing is too often viewed monolithically deemed either “good” or “bad.” 

“Ultimately, considering all ESG ‘good’ or all ESG ‘bad’ is not prudent,” the Wilshire report stated. “This binary view fails to acknowledge the nuances of ESG investing. Like any investment, the product, people and process matter. Furthermore, this view of ESG limits the ability to see that folks on either side of the debate have a lot more common ground than the headlines and rhetoric would suggest.” 

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