On Retirement

Small businesses face a big retirement challenge

State-backed IRAs offer creative savings solutions for millions of workers

Jul 17, 2018 @ 11:43 am

By Mary Beth Franklin

Here is an amazing statistic: Small businesses account for 99.7% of all U.S. firms and employ more than half of all American workers, according to the Small Business Administration. Collectively, small businesses drive the economy, but many of those small business employees are missing out on a key benefit of full-time employment: access to a retirement savings plan at work.

Freelancers, consultants and other part-time and on-demand contractors are in an even more precarious situation when it comes to saving for their future.

All told, about 55 million American workers — more than one-third of the U.S. workforce — don't have a retirement savings plan, jeopardizing their financial future and potentially straining an already overburdened Social Security system when they reach retirement age. And that just doesn't make sense when solutions are readily available.

"Small business owners want to offer the kind of benefits that will help them attract and retain talented workers, while also helping their employees save for their futures," said John Arensmeyer, founder and CEO of Small Business Majority, an advocacy organization for small businesses and freelancers.

"Unfortunately, retirement plans are often too expensive or too difficult for small employers to provide, so these firms need options that are easy to administer and also make sense for small businesses' bottom lines," Mr. Arensmeyer said.

Small business owners support a wide array of solutions that would make it easier for small businesses, freelancers and solo entrepreneurs to access retirement benefits, according to a recent poll conducted on behalf of the Small Business Majority.

More than two-thirds (68%) of small employers support an auto-IRA or Secure Choice plan in which small employers that don't currently offer a plan would be automatically enrolled in a state-created IRA. Auto-enrolled employees could opt out of the plans or adjust their contributions at any time.

The poll, based on interviews with 500 businesses nationwide that employ two to 100 workers, also found small employers are turning to independent workers to help meet their staffing needs and control expenses.

More than half of all small business owners — 52% — have hired independent contractors or freelancers in the past year, and of those, more than one-third say they plan to hire more in the next year. While nearly half say they hire independent workers to help keep costs down, the majority are hiring freelancers to address the fluctuating needs of their business.

"We use freelancers to fill in the cracks in our operation," said Delano Wilson, owner of M*A*C*S, a communications firm in Shreveport, La. "If there is a particular skill set needed at a given point in time, freelancers help us solve that need."

Mr. Wilson said he would like to offer a retirement plan to help his employees save for their future and to compete for top workers with bigger businesses that offer generous retirement packages, but he can't afford it. "That's why a state-backed program that gives employees the option to save for retirement would be a game changer for me," he said.

Some small businesses have found a solution to their retirement benefits challenges, according to Vanguard's "How American Saves 2018: Small business edition." The report focuses on trends relevant to Vanguard Retirement Plan Access clients, who include full-service plan fiduciaries for plans under $20 million. VRPA, first launched in 2011, served 8,900 retirement plans and 370,000 participants by the end of 2017. The average VRPA plan has 42 participants and $2.6 million in assets.

On average, VRPA participants saved 7.1% of their income in their employer's plan, which compares to the 6.8% deferral rate for large company participants in 2017. "Small business participants were doing well in these measures even without the scale of administrative and educations resources available to the largest corporate plans," the report said.

As of December 2017, 15% of VRPA plans had adopted automatic enrollment and slightly more than half of those plans automatically enroll participants at a 3% contribution rate. Nearly all of the plans use a target-date fund as the default.

Although TDFs, which allow participants to invest in a single fund of funds with an investment strategy appropriate for their assumed retirement date, have gained popularity as an investment option in defined-contribution plans as a result of their professional management and simplicity, there is still room for improvement.

"Asset classes such as private equity, real estate and hedge funds can be used to create a 'diversified TDF' that improves retirement outcomes by diversifying the investment portfolio with alternative asset classes and improving returns when compared with a portfolio solely composed of equities and fixed income," according to a new report on the evolution of target-date funds from the McCourt School of Public Policy Center for Retirement at Georgetown University.

"With the growth of DC plans, there is now a greater need for the DC industry to support adoption of strategies that will improve expected investment performance," the report concluded.

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