Americans Are Underprepared for Retirement. Here's How Small Businesses Can Help Close the Savings Gap. Half of the American workforce doesn't have access to an employer-sponsored retirement program, yet we are 15 times more likely to save for retirement if we can do so at work — and small businesses can help. Here's how.
By Aaron Schumm Edited by Kara McIntyre
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Today, half the U.S. workforce does not have access to or participate in an employer-sponsored retirement program. Furthermore, a quarter of all Americans are without any retirement savings, which significantly contributes to the overall savings gap in the United States.
I'm a firm believer that small businesses are the catalyst to making a significant change in addressing this gap. An AARP survey shows that Americans are 15 times more likely to save for retirement when they can do so at work. They are 20 times more likely if the program is automatic. When employees face financial hardship, they are naturally more likely to be distracted at work. With the rise of state mandates, requiring businesses of various sizes to implement a workplace savings plan, it's important for small businesses to understand their options.
There's a lot to consider before setting up an employer-sponsored retirement plan. Typically, employers look at several factors, including overall business goals, the number of employees and whether you want to offer a match. After an employer-sponsored retirement plan is set up, consider working with a financial advisor to evaluate the best options for your unique business and ensure all employees are engaged and maximizing their benefits. After all, the main reason for setting up these plans is to benefit your employees.
Whether you're a business owner operating in a state with a recently passed deadline or want to get ahead of upcoming deadlines in the years to come, there are several ways these programs are helping small businesses offer an affordable solution to their employees.
Related: The Easiest Ways to Support Your Employees' Retirement Future
1. Consider a state savings program
In recent years, state governments have begun to tackle the savings gap within their own communities by creating a state-facilitated retirement savings program focused on supporting small businesses. Currently, 46 of the 50 states either have a state program in place or are in talks to pass one. According to a recent Pew Charitable Trusts report, many respondents "welcomed the advent of auto-IRAs in their state said they see offering retirement benefits as a way to attract and retain workers, and 67% of those who supported auto-IRAs simply said that such a program 'would help my employees.'"
State retirement savings programs are often one of the most cost-effective options on the market for small businesses. Employers benefit from a solution without out-of-pocket costs such as program, administration or investment fees. These savings programs are typically set up as auto-IRAs, which allow employees to contribute after-tax dollars through automatic and voluntary payroll deductions. There are also no employer matching requirements for this plan, which often makes this a more affordable option for small businesses.
If you're looking to adhere to your state's mandate and looking for a quick and affordable solution, the auto-IRA might be a great choice for your business. Employer responsibilities are limited to registering for the program, adding employee information and remitting contributions each payroll cycle. Keep in mind that while there are no set-up fees, employers may be paying additional fees elsewhere such as payroll companies, bookkeepers or other service providers to facilitate the program.
Related: The Basics of Employee Benefits
2. Customizing your workplace retirement plan
The rise of state programs and new legislation in the industry are spurring the rise of fintechs that are able to offer affordable retirement savings plans for small businesses. A major misconception about these new state programs is businesses must offer the state's program to their employees. In reality, to comply with these mandates, a business (usually with five or more employees) must facilitate the state program or start a retirement plan with an independent provider of its choosing.
In recent years, a growing number of small businesses have benefited from affordable, flexible and user-friendly workplace savings programs. While traditionally these businesses have been unable to access 401(k) plans due to challenging operational procedures and exorbitant fees charged by legacy providers, the rise of new fintech companies is changing this outcome. Fintechs built on modern technologies enable small businesses to offer a great workplace savings plan for their employees.
401(k) plans allow employers to become more involved with their plans and customize the way in which they serve their employees. By partnering with a fintech company, the advanced technology eliminates administrative fees, bringing another highly affordable solution to small businesses. When offering a 401(k), employers have greater flexibility than when offering a state-facilitated auto-IRA plan. They have the ability to choose their own investments, have more control over company matching and eligibility rules, and may even be eligible for tax incentives. 401(k) plans also allow for greater contributions of $20,500 as compared to IRAs which only permit deductions of up to $6,000 in earnings.
Related: Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market.
3. Beyond retirement: Financial wellness programs
A large industry trend we're seeing is the rise of financial wellness programs. Why? Nearly 43 million Americans (or 1 in 8 people) have federal student loan debt. Almost 60% of individuals cannot afford a $1,000 emergency. Closing the savings gap means we need to address more than just retirement savings. A significant way to support your employees is to consider offering a more comprehensive suite of benefits. Offering more than retirement also sets you apart from other employers for recruiting and retention purposes. 529 College Savings Plans, emergency savings accounts and health savings accounts are all excellent programs to further support your employees and enable them to save for the critical aspects of their life — retirement, education and health.
Regardless of what state your business is located in, there are many options available to small business owners looking to implement a workplace savings plan. Tax incentives, recruitment and retention benefits, and investing in your employee's futures are great reasons to explore your options today. Benefits should be an evolving conversation for small business employers. Setting up an auto-IRA plan through your state might work best for your business today and in a few years' time, you may find a 401(k) to be a better fit.
Keep in mind that your workplace retirement plan selection is not permanent. In most states, you'll have to choose a retirement plan to meet the program requirements, however, if you decide to switch down the line, you will be able to do so. With the rise of fintechs entering the space, new legislation and evolving state mandate launches, now is the time for employers to implement a savings solution for their employees.
