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

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.

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.