Retirement Plan Options for Small Businesses Have Pros and Cons

Small U.S. employers overwhelmingly trust the financial services sector for its expertise more than government entities when it comes to administering financial assets and retirement savings programs, a survey sponsored by the SPARK Institute and conducted by Cerulli Associates found.

The survey asked participants to rank large financial services firms; third parties, including local and state government; and associations such as the U.S. Chamber of Commerce, with respect to managing finances and retirement plans. Eighty-nine percent of respondents said they have a high level of trust in retirement plan providers, compared to 53% for state governments.

The survey also evaluated employer knowledge of state-run programs. Cerulli says that if such programs, two of which are currently running in California and Oregon, are set up correctly, they can be cost-effective and simple for employers to administer. The downsides, however, are they offer limited savings opportunities and are run differently in each state.

Cerulli notes that multiple employer plans, or MEPs, also provide simplified administration and lower costs for smaller employers. However, they still require the employer to take on the fiduciary duty to select and monitor the MEP. Individual plans, such as 401(k)s, require a higher level of employer responsibilities and fiduciary duties—but they can be customized to suit each workplace and are powerful tools for attracting and retaining talent.

“Our findings show that the proposed coverage solutions are not mutually exclusive,” says Tim Rouse, executive director of the SPARK Institute. “State-run programs, MEPs and individual plans all have appealing qualities to employers at different stages of their growth. An effective retirement system provides alternatives to U.S. employers and gives them the ability to move easily from one program to the other as their workforce changes and evolves.”

SPARK says it believes that covering all working Americans with a retirement plan should be a priority and is an achievable goal. Currently, half of employees at small employers do not have access to an employer-sponsored savings plan. SPARK says it supports the Retirement Enhancement and Savings Act (RESA), which would pave the way for more MEPs; currently the MEP market is $211 billion and experiencing modest inflows.

Additionally, Cerulli says state-sponsored plans “represents a rare growth opportunity [for] small businesses in the mature U.S. recordkeeping and asset management industries.” However, fewer than one-quarter of small business owners that currently do not offer a retirement plan say they would be “very likely” to join a third-party sponsored plan. Cerulli says that to be successful, state-run retirement plans would need to be mandatory, although small business owners would, in all likelihood, object to that.