Closing the 401(k) Coverage Gap: The ‘Better’ Business Bureau

 The solution to the coverage gap lies through small business—but only about a third have been approached in the past year about offering one, according to a new survey.

That’s not exactly a new revelation—any number of surveys and government data throughout the years indicates that the vast majority of large(r) employers already offer a workplace retirement plan.[i] The coverage “gap” so often held out as a sign of “failure” by the critics of the 401(k) lies almost exclusively among smaller employers. Which means that closing it will require a focus on small business—and understanding the “resistance.”  

At the outset, it’s worth acknowledging a certain truism about small plans (the kind small businesses set up)—they are sold, not bought. Consequently, it was disappointing to see that datapoint about just 31% of the businesses that do not currently offer a plan having been approached in the last 12 months about offering one.[ii] 

That survey finding was included in a recent report by the Employee Benefit Research Institute (EBRI), along with the Center for Retirement Research at Boston College and Greenwald Research. Asked why they weren’t offering a plan, the vast majority (74%) said that their business was either too new or too small. That said, among the highly cited reasons for not offering a plan, nearly as many (72%) said required company contributions are too expensive (yes, they mistakenly assumed company contributions were required[iii]), 70% said their revenue is too uncertain to commit to a plan, and 70% said it costs too much to set up and administer. In sum, most of the resistance came down to financial factors—and considering the failure rate of most small businesses, that’s hardly surprising.[iv]  

Indeed, asked about factors that would encourage them to establish a plan, the most cited reason (by 79%) was an increase in the business’s profits. But the next set of reasons most cited as likely to get small businesses to offer a plan were business tax credits for starting a plan (75%) and a plan with low administrative requirements and/or no employer contributions (74%).

Now, in that context, consider that among the small business owners not offering a plan, almost three-quarters (72%) said they were NOT aware[v] of tax credits up to $5,000 being available to cover the costs of starting a retirement plan—though 78% said the tax credits would make it at least somewhat more attractive to offer a plan[vi]—and more than a quarter (28%) said it would make it MUCH more attractive![vii]

The good news is, courtesy of the tax incentives in the SECURE 2.0 Act of 2022 (and the ability to shatter some myths about plan design), we have a message that could make a real difference in plan adoption—one that would be good for business—and your business—as well.

- Nevin E. Adams, JD

 

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[i] From 2010–2023, the fraction of establishments with less than 50 workers who offered a retirement plan ranged from 42%–52%. For establishments with 50–99 workers, 70%–79% offered a plan, and 78%–91% of establishments with 100 or more workers offered one. See Bureau Labor Statistics, “Employee Benefits in the United States, March 2023,” Historical Tables. https://www.bls.gov/ebs/publications/employee-benefits-in-the-united-sta....  

[ii] However, the small businesses with 50–100 employees were much more likely to have been approached, with 58% saying they had been. On the other hand, that’s roughly (only) half.

[iii] The researchers commented that it was interesting that “the one statement that was not true had the highest percentage of business owners agreeing with it, as 63% of these owners agreed that employer contributions were always automatically vested. In both cases, those offering a plan were more likely to agree with the statements than those that did not offer a plan. Thus, it appears that small business owners don’t understand the potential flexibility in offering an employment-based retirement plan, which is not unexpected, as larger employers typically have experts or access to experts on benefits that would not be available to smaller businesses.”

[iv] Somewhat surprisingly, the administration being too burdensome and the possibility of being out of compliance with government regulations or held liable for investment decisions made by employees—obstacles often targeted in legislation and regulatory safe harbors—were the LEAST likely to be cited as a reason for not offering a plan.

[v] Awareness of these tax credits was different by the size of the business, as 50% of the small business owners with 50–100 employees were aware of the tax credits vs. less than 25% of the small business owners with fewer than 50 employees. Businesses with 10–19 employees were the most likely to say that the tax credits would make it at least somewhat more attractive to offer a plan.

[vi] Despite being lower ranked than the attraction and retention of workers, 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 are reasons for offering a plan—though only about 5% of the small business owners cited each of these as the most important reason.

[vii] Half (51%) of small business owners offering a plan were not aware of the Saver’s credit/match—while 83% of those not offering a plan weren’t aware—though 69% of the small business owners said the Saver’s credit made offering a retirement plan at least somewhat more attractive. 

The Fear of Finding Out

I hadn’t been to the dentist in a long time. A VERY long time.

Two weeks ago, and at the encouragement of my wife, I finally went back to the dentist. I hadn’t been since COVID, and that period provided a very good excuse for avoiding that visit. Turns out, I hadn’t been for quite a while before COVID—not so much intentionally, just life getting in the way.

That’s not completely accurate, of course. On the best of visits, trips to the dentist had never been exactly “pleasant,” though I’ve been fortunate to be in the hands of friendly, patient and—gentle—staff over the years. That said, my last visit had involved what wound up being a unexpected and relatively involved procedure that, while it remedied a painful (and potentially dangerous) situation, left me with a certain, shall we say, “fear of finding out”…

Now, avoiding the dentist didn’t prevent problems, of course. And many’s the day over the past several (gulp!) … years when I would tell myself that it would be better to catch—and fix—a problem early. But, concerned about what such a visit would find … well, I kept on finding reasons not to … find out.

I wrote recently about the 33^rd Annual Retirement Confidence Survey, published by the Employee Benefit Research Institute (EBRI) and Greenwald Research, which found both workers’ and retirees’ confidence in having enough money to live comfortably throughout retirement dropped—and while it was the sharpest decline in confidence since the so-called Great Recession—it wasn’t as sharp as one might have expected under the circumstances (high inflation, volatile markets, uncertain job environment).

But below that headline (and, let’s face it, “confidence” can be a fluid sentiment), that same survey found that (only) about half of workers have “tried to figure out how much money” they would need to have saved by the time they retire so that they could live comfortably in retirement. Which calls to mind the question; is their confidence (or lack thereof) a function of them having made that assessment[i]—or is it more a case of “ignorance is bliss?” Or are they simply afraid to find out?

Well, as Greenwald Associates CEO Lisa Greenwald recently reminded me, not only are those already in retirement more confident about their prospects, retirement confidence also tends to be higher among those who have actually made the assessment—even when, based on the limited objective information available (including the aforementioned “guessing”)—there might not be a “rational reason” underpinning that sentiment at the moment. 

As it turned out, my trepidations about my return to the dentist weren’t unfounded; there was some work that needed to be done that wasn’t pleasant, and yes, it might have been less unpleasant if I had made that visit earlier. On the other hand, now that I’ve been, I have a sense of how things stand, and I no longer have to worry about how bad it MIGHT be. Yes, I have already made my next six-month checkup—and yes, I’m not nearly as concerned about that visit as I was this past one.

Yes, despite the “fear of finding out”—be it a trip to the dentist, the doctor, or a retirement needs assessment—there is something to be said for having a professional assessment, of having a sense of what has to be dealt with—so that you can. 

- Nevin E. Adams, JD 

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[i] On the other hand, in previous years when that question was asked (and the number having made an effort to determine need nearly identical) the RCS found that the most common method of ascertainment was—guessing (45%).

The Sure Not-So-Sure Thing

 By some accounts, I just spent the past week in “retirement”—driving around sightseeing, reading some good books, hanging out with family, and yes—even walking on a beach.

And I have to tell you—if that was retirement, I don’t know how I’m going to afford it.

Now, I realize that isn’t the stuff of most “real” retirements, though it is frequently the stuff of retirement planning brochures. My week was a family vacation, and it was spent doing the things that families do on vacations.[i] And it served as a stark reminder that while sitting on a beach doesn’t cost much, making arrangements to stay—and eat—in proximity to the aforementioned beach is a whole other financial consideration.

That said, when those actually in retirement are asked about their retirement confidence—well, it’s pretty high. According to the Employee Benefit Research Institute/Greenwald Associates annual Retirement Confidence Survey, 77% of current retirees report feeling either very (33%) or somewhat confident about having enough money to live comfortably throughout their retirement years. All of which suggests that if there’s a lot of uncertainty about what retirement will be like/cost, once you’re “in it”—well, you both have a sense of what it’s going to cost, and how much you have to cover it.[ii] That, by the way, despite the reality that the same RCS has for years found that significant numbers of individuals have found themselves in retirement through no choice of their own[iii]—sometimes due to health, sometimes due to employment-related decisions. 

Today we are looking at an unusual confluence of events: a tight job market in the middle of what has been termed the “Great Resignation,” surging inflation at rates not seen in a generation, and investment markets that, after a remarkable run-up—well, let’s just say it’s been rough on most 401(k) accounts. We’re getting the same kinds of investment advice we always do/give during such downturns—but one can’t help but wonder if it’s “different” this time—if the disruptions are anything but “transitory.”

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, or deal with the financial consequences of an unexpected medical emergency (or that of a loved one). That this happens at the same time that your investment portfolio is taking a sustained “hit” contributes to the sense of economic pessimism that garners so much press, polling and political aspirant attention in this election season. Without question, things cost more than they did (when you can find them on the store shelf), and those on fixed incomes (and that includes a growing number of current workers who perhaps haven’t gotten a pay increase in a while) have to make “adjustments”—often painful ones. And if all of this doesn’t warrant changes in financial plans, it certainly warrants a new level of discussion about them.  

Perhaps the only “sure” things are death and taxes after all—but the lesson for those of us still drawing a paycheck and planning for retirement is the importance of preparing for that third “sure” thing when it comes to retirement planning: uncertainty.

- Nevin E. Adams, JD

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[i] In fairness, we also spend a day tracking down the gravesites of some ancestors, and that probably isn’t on most vacation agendas!

[ii] It’s worth highlighting, of course, that workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are twice as likely as those without any of these plans to be at least somewhat confident (83% with a plan vs. 40% without one). 

[iii] In the 2022 RCS, 32% who retired earlier than planned say they did so because of a hardship, such as a health problem or disability, not related to COVID-19. Another 23% say that they retired due to changes at their company, but 38% say they could afford to retire earlier.