‘Positive’ Thinking: Why Small Businesses That Offer a 401(k) Do So

Last week we explored the reasons why small businesses DON’T offer a retirement plan to their workers. But there are quite different—and positive—reasons for choosing to do so.

The obstacles that keep most small businesses from offering a retirement plan to their workers are an assortment of factors, real and (somewhat) imagined. There ARE remedies for those concerns,[i] but mediation of those concerns doesn’t seem to be a factor in the motivations of small businesses that DO choose to offer a plan.

Reasons ‘Able’

According to that recent survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research, when the small business owners who offer retirement plans were asked the reasons that they do so, factors associated with attracting and retaining workers were the most prominent. Indeed, the vast majority—more than 9 in 10 of the small business owners[ii]—said that a reason they offer a plan is the positive effect on employee attitude and performance. 

According to the report, 90% said that a competitive advantage for the business in employee recruitment and retention is a reason for offering a plan. In fact, nearly a third (30%) said the positive effect of offering a plan is the MOST important reason, though nearly as many (25%) cited the competitive advantage as the most important reason.

Tax ‘Tacts’

Not that tax benefits and preferences weren’t factors; roughly two-thirds of the small business owners said that tax advantages for key executives and allowing the owner to save for retirement on a tax-deferred basis were (also) reasons for offering a plan, though only about 5% of the small business owners cited each of these as the most important reason.

The bottom line is there are any number of good, positive reasons—benefits for workers and business owners alike—for offering, and participating in, a workplace retirement plan. Unfortunately, there are also any number of reasons to put off doing so—not enough time, worries about the expense, confusion about the options, inertia, and that all-too-human inclination to put off big decisions for another day.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

- Nevin E. Adams, JD

See also: 5 Reasons Why Your Small Business Should Offer a Retirement Plan | National Association of Plan Advisors (napa-net.org)

 

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[i] Notably the tax credits included in SECURE 2.0.

[ii] While those small business owners seem committed to the offering, the survey DID find some points of confusion with regard to the obligations associated with that undertaking. Turns out the one statement the survey asked about plan design requirements that was not true had the highest percentage of business owners agreeing with it; two-thirds (63%) of these owners thought that employer contributions were always automatically vested (in fairness, those who didn’t offer a plan were even more mistaken—and that WAS cited as a reason for not offering a plan).

4 Reasons Why Plan Sponsors Should Care About Outcomes

It’s obvious why participants have a vested interest (literally) in the retirement income — the outcome, really — of their retirement savings plans. Here are four reasons why plan sponsors should care about outcomes.

You want your employees to appreciate your benefit plan(s).

If you’re responsible for benefit plans in your organization, you have a very real interest in how your workforce (and management team) view those benefits. Plan sponsors have long used participation rate as the plan success metric — after all, what better measure of success in plan design, education and communication than the objective data as to how many employees have chosen to participate.

But in a time when a growing number of plans have adopted automatic enrollment — well, while credit is certainly due plan sponsors who have taken that step, the resulting bump in participation rates owe more to the inertia of human behavior than innovative plan design.

There is, however, little question that the better your plan performs on an individual basis — positive growth in account balances, a resulting more robust projection of retirement income — the better workers will feel about the benefit plans that helped provide that result.

You don’t want your employees worrying about their finances at work.

Any number of workplace surveys bear out the impact that external concerns — particularly external financial concerns — have on morale and productivity at work (see “Finance Distractions Take Toll on Productivity, Benefit Satisfaction”) and “Study Finds Link Between Financial and Physical Wellness.”) Those concerns don’t even touch on the vulnerability to theft and/or misuse of organizational resources that can tempt financially vulnerable workers.

A robust retirement savings balance at work isn’t a cure for all financial ills, of course, but it can be a source of solace, as well as a resource in time of true financial need.

You want your employees to retire on time.

Workers who think they can’t afford to retire are likely to try and extend their working career — potentially complicating succession planning and your ability to attract (and/or retain) new talent. Data from benefits consultant Mercer notes that each delay in retirement can block 5+ jobs, and that if 4% of your population is retirement eligible and half of those people choose to delay retirement, 10% of your employee population would experience promotion blockage.

As an employer, those trends can also result in higher labor costs, and safety and productive concerns (see “Plan Sponsors Waking up to Costs of Older Workers who Can’t Retire.”)

You want your plan to ‘work.’

There are employers who only offer a workplace retirement plan because everybody else does, who are willing to just “set it and forget it,” who, hearing that workers aren’t taking advantage of the benefit they worked so hard to set up, shrug and say “it’s up to them.”

But that’s not you. Is it?

- Nevin E. Adams, JD

Note: You can find some interesting perspectives on various aspects of plan and participant outcomes at our Participant Outcomes resource page.