Small-business owners who want to offer retirement savings plans to employees are hoping Congress takes a serious look at the issue this year.
The House Committee on Small Business in the fall held a hearing on the state of retirement savings for small employers, noting administrative complexity and costs could discourage some businesses from offering the benefit.
The committee cited a 2012 study by the Government Accountability Office that found only 14 percent of businesses employing 100 workers or fewer sponsored some type of savings retirement plan. The GAO study said that of employers with one to four workers, only 5 percent of such businesses offer retirement savings plans.
“Small employers understand the importance of providing good benefits, including retirement savings options, to attract and retain quality employees,” Rep. Sam Graves, R-Mo., said at the Committee on Small Business hearing. “However, in today’s economy that can be very challenging.”
President Obama, in his State of the Union address Tuesday night, announced a measure that could help at least some people – the creation of new government-sponsored savings accounts for workers who don’t have access to a 401(k) plan. But the new accounts aren’t expected to solve the problem entirely.
In an interview with BenefitsPro.com, another Missouri Republican, Rep. Blaine Luetkemeyer, who is vice chair of the committee, said policymakers are worried that the still-recovering economy could continue to create barriers for small employers in offering retirement plans.
“The cost of retirement plans is something that’s very significant to them,” he said. “Their bottom lines are being squeezed, with a weak economy that hasn’t progressed as folks would have hoped. The regulatory burden continues to increase. They’re looking at options; they’re trying to figure out how to afford this.”
Still, small-business owners know that having a retirement plan available makes them more competitive in their pursuit of talent.
A report by the Transamerica Center for Retirement Studies, released in conjunction with the committee hearing, found that 88 percent of employees with small companies say they value retirement benefits. And a study by Sharebuilder 401(k) found that 89 percent of small-business owners that offer 401(k) plans say that the benefit is an important factor for attracting and retaining talent.
Catherine Collinson, president of TCRS, testified at the hearing, offering several suggestions for helping small-businesses provide retirement plans to workers.
These included expanded tax credits to offset the costs borne by small businesses in offering retirement plans, the establishment of multiple-employer plans that allow small-business owners to collaborate in offering plans, and increasing the default contribution rate of savings plans.
“The current 3 percent minimum default contribution rate sends a misleading message to plan participants that savings at these levels is sufficient for a secure retirement,” Collinson said at the hearing. Plan participation would likely increase if tax policy were changed to encourage workers to save at higher rates, she said.
In addition to the cost incurred in offering retirement savings plans, the administrative burden is considerable as well, several people at the hearing said.
Ray Rucksdashel, chief financial officer with Houston-based Quest-Tec Solutions, testified that while his company supports 401(k) plans, administering them is so complicated that his company contracts with a professional employer organization to help it with administration of its retirement benefit.
“In my view, administrative complexities of the 401(k) plan administration are the biggest obstacles to small businesses offering employee retirement services,” Rucksdashel said. “I have 40 years of experience in financial operations in small companies, and I don’t have the time or the experience to manage 401(k)s. They are just too complicated.”
Rucksdashel acknowledged that while he saw the need for regulatory standards, the current system places too much of a burden on employers.
“Congress should look at ways to both encourage smaller companies to offer retirement benefits to their employees and at the same time look to simplify and streamline the administration of such benefits,” he said.” Education, outreach, and improvement to access of retirement programs like the 401(k) is very important.”
Collinson said the MEPS model could help ease administrative burdens considerably for small businesses owners.
“Conceptually, it is a group plan with a plan sponsor … who is well-versed in retirement plans that can handle the fiduciary and administrative duties and take that off the small-business owners’ shoulders,” she said. “To facilitate the offering of those types of plans and then even a tax credit for joining it could help go a long way towards inspiring plan sponsorship among the smallest of companies.”
According to Paula A. Calimafde, who represented the Small Business Council of America and the Small Business Legislative Council at the hearing, auto-enrollment and auto-escalation feature of retirement plans have been generally accepted by workers. She said studies show that plans that have auto-enrollment and auto-escalation of up to 6 percent see very few employees opting out.
“It is easier to just stay in than take active steps to get out,” Calimafde said. “As auto-escalation increases, the amount that employee is putting in on this automatic basis, the data is startling. People just let the amounts keep building up, so even at a 6 percent contribution level … they just stay in and let the 6 percent go in. And putting in 6 percent into your plan and letting it grow tax-free is a very good way to save for your retirement.”
Framing the issue
With Congress likely to continue to focus on the economy and job-creation, Luetkemeyer said the hearing was helpful in framing the issues that small employers are facing.
Although the House Small Business Committee does not propose legislation, he noted that it reports to the Ways and Means Committee, which could address the issue with legislation at some point soon. Hearing from small businesses about their challenges in this area is helpful to policymakers, he said.
“Many small businesses look at their employees as part of their family,” Luetkemeyer said. “They want to make them feel like part of the company, and feel like they’re appreciated. (Offering retirement benefits) is something they want to do; it’s just a question of whether they can afford to do it.”