NCPA - National Center for Policy Analysis

Small Business and Employee Retirement Savings Plans

February 15, 2011

Over several decades, employer-provided pension plans have played a diminishing role in employees' retirement incomes.  Today, many of these plans are underfunded and some have been terminated.  Instead of pensions, many firms now offer defined contribution plans like 401(k) plans.  But not all employers offer defined contribution plans, particularly small businesses, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

According to the AARP Public Policy Institute:

  • In the smallest firms (less than 10 employees) less than 9 percent of workers are covered by a 401(k)-type plan.
  • In firms with 20 to 99 employees, 401(k) coverage increases to 36 percent of employees.
  • Compare this to firms with 500 or more employees, where nearly 60 percent of workers are covered by a 401(k)-type plan.

While providing such a benefit may be relatively easy for large firms, it can be an obstacle for small firms for various reasons, including not having enough employees to make it worthwhile and the inability to afford a company match (28 percent).

Villarreal says there are options for small businesses that want to provide employee retiree plans.  For example, excluding partnerships and sole proprietorships, businesses with up to 100 employees may implement 401(k) plans (either tax-deferred plans or Roth plans), or they may establish a Savings Incentive Match Plan for employees, known as a SIMPLE IRA. SIMPLE IRAs and 401(k) plans are similar, except that the SIMPLE IRA generally poses fewer administrative burdens and is more cost-effective for small businesses for several reasons.

Small businesses should be encouraged, but not mandated, to offer retirement plans for their employees.  In addition, small business groups should make information on how to set up retirement plans more readily available for small business owners, says Villarreal.

Source: Pamela Villarreal, "Small Business and Employee Retirement Savings Plans," National Center for Policy Analysis, February 15, 2011.

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