Small-business owners fail to offer retirement savings plans to their employees, with two-thirds saying they don’t offer a plan, citing cost, being too busy or not knowing how to start the process, a recent study found.
According to Fidelity Investments’ 2023 Small Business Retirement Index, only one-third (34%) of small employers currently offer retirement savings to employees.
Of those that do not offer a plan, almost half (48%) say they do not believe they can afford one. Other small-business owners feel they are too busy running their company to focus on it (22%) and an equal amount (21%) saying they don’t know how to start the process of offering a retirement plan.
Since nearly half of all U.S. employees work for a small business, according to the U.S. Small Business Administration, this could leave many individuals unprepared for the future, Fidelity said.
Read: Gig and self-employed workers need this to save for retirement
“Small-business owners are faced with so many challenges as they grow their business, from finding new customers to identifying their next round of funding,” said Andrew Schreiner, Fidelity senior vice president, small business retirement.
“While offering a retirement benefit can feel like a potentially expensive and overwhelming task, there are many retirement saving solutions available for companies of all sizes. In addition to helping their employees establish a secure financial future, a retirement benefit also can have an enormous impact in attracting and retaining top talent,” Schreiner said.
When asked what keeps them up at night as small-business owners, 54% of respondents said they are most worried about inflation when it comes to running their business, and 37% are worried about employee attraction, retention and well-being. In a tight labor market where small-business owners are forced to compete with larger competitors on compensation and benefits, it makes sense that 73% of small-business owners believe they can’t compete with larger companies, Fidelity said.
Even when it comes to their own retirement, 83% of small-business owners know they should be saving more for their futures, but 59% aren’t sure how to maximize their retirement savings.
Concerns intensify among microbusiness owners
Those who are self-employed or are running microbusinesses—those businesses with fewer than 10 employees—are most likely to say they cannot afford to offer a retirement savings plan to employees (71%), which helps explain why 55% of these employers do not currently offer a retirement plan and do not plan to do so, Fidelity found.
While microbusinesses agree that employees expect to be offered retirement benefits, the vast majority (82%) feel they can’t compete on benefits with larger companies, the study found.
When it comes to their own retirement savings, 85% of self-employed/microbusiness owners know they should be saving more for retirement, 75% aren’t sure if they are saving enough, and 42% worry they will never be able to retire. When asked what’s preventing them from saving more, the most common response is that they only earn enough to cover their expenses (42%).
“Self-employed individuals are carrying the entire weight of their business’ success on their shoulders,” said Roger Morrisette, Fidelity’s vice president of small business retirement products. “Understandably, many feel they do not have the time or resources to administer a retirement savings plan.”
New retirement rules, which are known collectively as SECURE 2.0, were put in place at the end of 2022 as a way to help improve retirement savings efforts. One provision is an expansion of the tax credit for companies with less than 50 employees to pay for administrative costs when starting a new plan. This and other measures in SECURE 2.0 may give small businesses a boost.
Read: People who work for a small business now have a better shot at retirement security
Options for small businesses
For small-business owners interested in starting a retirement savings benefit, there are several options available, Fidelity explained.
Self-employed 401(k)s: Intended for self-employed individuals or small-business owners with no employees other than a spouse, these accounts are funded through a combination of employee deferrals and employer contributions, allowing individuals to maximize the amount they can save.
SEP IRAs: Also intended for self-employed individuals or small-business owners with only a few employees, SEP IRAs are funded solely by employer contributions.
Simple IRAs: Funded by a combination of employee deferrals and employer contributions, SIMPLE IRAs help self-employed individuals and small-business owners gain access to a tax-deferred benefit when saving for retirement.
Pooled employer plans (PEPs): Designed for small businesses, PEPs allow multiple unrelated employers to participate in one 401(k) plan, reducing many of the obstacles and costs they face when offering a 401(k).
