The United States is on the verge of a retirement crisis. Why small business needs to be part of the solution.
Too many American workers aren’t ready for retirement. Unfortunately, their lack of preparation could become your problem.
Experts have been warning about the coming retirement crisis for years, to the point that all the alarm can sound like white noise. Just how bad is the situation, really?
» The U.S. Government Accountability Office says that 29 percent of U.S. households age 55 or older have saved absolutely nothing for retirement. Another 23 percent have no savings, but participate in a pension or some other kind of defined-benefit plan, the GAO found.
» About half of working-age families possess no retirement savings, according to a recent report from the Economic Policy Institute, a pro-labor think tank.
» Meanwhile, the Social Security Administration is staring down its direst challenge in more than 80 years of operation: the roughly 10,000 Baby Boomers who hit retirement age every day.
In 2000, there were 29 people receiving Social Security benefits for every 100 workers. By 2030, the ratio will be 47 beneficiaries for every 100 workers.
In anticipation of Boomers’ golden years, the federal government built up a “trust fund” that was worth more than $2.8 trillion last year. But most experts believe those reserves will be exhausted by the 2030s. Then, barring a hike in taxes or an adjustment to the program, Social Security would be able to pay out only 75 percent of promised benefits.
If the numbers are staggering, so is the potential for human misery. Workers who haven’t saved enough could find themselves unable to afford basic living expenses, at a time in their lives when it could be difficult to stay in the workforce.
Still, you might be wondering: How is this specifically a small business issue?
WHY SMALL BUSINESS IS PART OF THE SOLUTION
Well, many Americans save for retirement through their employers. And a sizable percentage of small businesses don’t provide any kind of retirement plan.
About a third of private-sector workers receive no retirement benefits through their job, the U.S. Bureau of Labor Statistics reported last year.
When you look at companies with fewer than 100 employees, only half offer any retirement plan, Social Security reported.
“The numbers are absolutely dismal, as far as the number, the percentage of small companies that offer retirement plans,” said Eric Kesselring, vice president at Axcet HR Solutions, a Lenexa-based professional employer organization (PEO) and HR solutions business.
If a company declines to offer a retirement benefit, couldn’t individual workers set up an IRA or some other vehicle on their own? Sure. Are most likely to do so? Nope.
Even when employees are given the chance to participate in a company retirement plan, not everybody joins up. The BLS found that only 77 percent of workers took part in their employer’s retirement offerings.
Considering that small companies employ about half of America’s workforce, that’s a big gap in our nation’s retirement picture. And policymakers are starting to look for solutions.
WHAT THE GOVERNMENT IS CONSIDERING
Recently, the U.S. Treasury Department unveiled its new myRA program, a savings account for people who aren’t offered a 401(k) through their work and who might not meet the threshold for private IRAs.
The good news is that myRAs have no fees and accountholders can’t lose any of the money they put in.
That’s because the money is invested in Treasury bonds, which have a small rate of return. And individuals cannot put more than $15,000 into a myRA. The accounts are viewed as a baby step to get more people into the habit of saving for retirement.
“I think it’s a great idea for people that don’t have access to a retirement plan, that want to start saving for retirement,” Kesselring said. But, he added, “it’s not going to get them very far toward their retirement goals.”
As part of his 2017 federal budget proposal, President Obama included a series of ideas to encourage employers to offer some kind of retirement plan. While the plan is mostly carrots, there is some stick, too.
» Make it easier for companies to join together and form pooled 401(k) plans.
» Increase the tax credit that’s available for small businesses that start new retirement programs. Under the president’s plan, the credit would triple to $1,500 per year for three years.
» Expand retirement plans to include longtime part-time workers—those who put in 500 hours or more per year and who’ve been with the company at least three years.
» Require employers—if they have at least 10 workers and don’t already offer a retirement plan—to automatically enroll their workers in an IRA.
A handful of states—California, Illinois, Connecticut and Oregon—have passed similar “automatic IRA” programs that require employers to set aside a portion of employees’ earnings. Some experts have even talked about a national forced-savings plan that would require employers to set aside money on workers’ behalf. (Each worker would own his or her account, which would travel with them.)
Republican Sen. Marco Rubio has previously recommended opening the federal Thrift Savings Plan to anyone whose employer doesn’t offer a retirement plan. The TSP is a program for civil servants and the military, and it works a lot like 401(k) and Roth 401(k) plans. One of its key benefits is its low administrative cost.
Who knows how far any of these proposals will go? Congress has refused to hold hearings on the president’s budget proposal. And automatic IRAs have been able to win passage only in Democratic-controlled legislatures.
WHAT ARE YOUR OPTIONS?
If small businesses don’t already offer a retirement plan, it’s not because they don’t want to. It’s usually because they don’t think they have the time, money or expertise to set one up.
“Small businesses are just trying to do what they do best: offer their products and services and build the business,” said Steve Soden, the CEO and president of Great Plains Trust Company, an Overland Park firm that helps employers establish both defined-benefit and defined-contribution plans.
Too many business owners view retirement benefits as a “someday” task, but it might be easier to launch a retirement plan than they think.
What are some of the more common options for small businesses?
Simplified Employee Pension (SEP) IRA // These accounts are available to any employer with one or more workers. Set-up cost and paperwork are a relatively small burden, but all contributions technically come from the employer. The employee doesn’t have a say
in how much is put into the account.
Savings Incentive Match Plan for Employees (SIMPLE) IRA // This is a savings account for companies with 100 or fewer workers. Employers have to match an employee’s contribution up to 3 percent of the employee’s wages. Or the employer can make a fixed contribution equivalent to 2 percent of wages for all eligible employees, even if those workers don’t actually put any of their own money into their SIMPLE IRA.
SIMPLE IRAs’ annual contribution limit is $12,500 for workers, though those over 50 can make catch-up payments worth up to $3,000.
401(k) // This is one of the most popular, best-known types of retirement accounts. The contribution limit is higher: Employees can put up to $18,000 per year into a 401(k)—plus another $6,000 per year in catch-up contributions for those 50 and older.
But 401(k)s also are more complicated and typically require the help of a financial adviser or institution, which will charge a fee.
This is an area where larger companies have an advantage. They have more employees, so when it comes to plan administration costs, their cost-per-worker is lower. PEOs may be an option for smaller businesses, though. Because several companies come together as one benefits group, the cost-per-employee shrinks.
While 401(k) accounts are popular, they’re not a cure-all. The Economic Policy Institute’s recent report showed
that lower-income workers still aren’t putting enough money into their accounts. Single people, ethnic minorities and women are all less likely to save.
When it comes to retirement savings, there are two kinds of inertia, said Greg Smith, president of local startup blooom. The Leawood company is an online registered investment adviser that professionally manages its clients’ employer-sponsored accounts, such as 401(k)s, on their behalf.
The bad inertia is the kind where employees never start saving, Smith said. But if employers can help them get signed up for a 401(k) or some other vehicle and start a basic payroll deduction, then that is a great first step. The next step is to help connect the employees to services that properly manage those funds.
This essentially allow the employees, if they choose, to basically “set it and forget it.” Over time, that can grow into a healthy nest egg.
“Unfortunately, half of American workers never get access to those plans,” Smith said.
Even if the government doesn’t push small businesses to offer some kind of retirement benefit, the job market might force them to.
That’s because, as more Baby Boomers retire, competition for workers will increase.
“They are competing for talent,” Kesselring said. “And the kind of businesses that we work with, it’s very important for them to offer a retirement plan of some kind.”
Soden agreed: “We’re hearing more and more where younger people are coming to job interviews and asking not about vacation policy, but ‘Do you have a retirement plan and what are the specifics?’
“They are eventually going to gravitate to some place that gives them a vehicle to save for the long haul.”