When it comes to offering 401(k) plans to their workforce, companies with less than 100 employees are far behind their larger counterparts.
The Current State of 401(k)s: The Employer’s Perspective, a study by the Transamerica Center for Retirement Studies, found that only 72% of these micro companies offer a retirement plan to their employees. In comparison, 92% of companies with more than 500 employees offer these plans.
Transamerica surveyed 1,000 employers and 4,550 workers and found that both workers (89%) and employers (84%) believe retirement benefits are important. Despite this, the costs and management burden of offering a retirement plan inhibit many smaller companies from doing so.
One way around this is to allow smaller employers to participate in a multiple employer plan.
“As we look to increase plan sponsor rates, if a company feels it is not large enough or it is concerned about cost or not having the wherewithal to stand alone, a multiple employer plan is a good alternative,” says Catherine Collinson, president of the Transamerica Institute.
But currently multiple employer plans can be provided only by professional employer groups and trade associations. That’s why Collinson and other industry experts would like to see the definition of who can sponsor and join a multiple employer plan broadened. She also would like the so-called bad apple rule eliminated. Under current law, in a multiple employer plan arrangement where there are a number of contributing employers, the non-compliance of a single sponsor could jeopardize the qualification status of the entire plan.
“As the conversation intensifies for coverage, the concept of an open MEP would make it easier and more cost effective for small businesses to offer a qualified plan to employees without taking on all the responsibilities of establishing a standalone plan,” she notes.
Cathy Weatherford, CEO of the Insured Retirement Institute, agrees. In a statement last week, she observes that “workplace plans are a powerful tool in helping Americans save and prepare for their retirement years. Unfortunately too many Americans don’t have access to a retirement plan at work, leaving many ill-prepared to meet their future financial needs. This coverage gap is most acute among workers of small businesses. Allowing more startups and small businesses to join multiple employer plans would greatly increase the number of workers with access to a workplace plan and go a long way toward helping Americans prepare and save for their future financial security.”
PART TIMERS LOSE OUT
Part-time employees face another gap in retirement coverage. The Transamerica report found that “while 74% of employees offer a 401(k) or similar plan to their full-time employees, only 38% of them extend eligibility to part-time workers.”
In keeping with the general trend, large plans are more likely to extend these benefits to part-time workers than small or micro plans.
Of the plan sponsors who don’t offer retirement benefits to their part-time workers, 91% said they don’t plan to do so because it is either impractical, costs too much or because of the high turnover among part-time workers.
“If companies are not extending eligibility to all employees there are segments of the workforce being left out,” Collinson points out. “So a critical component is extending access to part-time employees.”
Automatic features can help drive employees to save for retirement. The Transamerica report found that 71% of workers like the idea of being automatically enrolled in a workplace retirement plan. They also believe that the automatic deferral rate should be at least 6% of salary, where the average today is still 3%.
Sixty-seven percent of workers say they would likely take advantage of annual automatic increases to their retirement plan contributions.
Unfortunately, says Collinson, “we see a low response rate among employers offering it and a high response from workers who find it appealing.”