Employees who work for big companies don't always realize how good their benefit packages are. Attractive health-insurance options for workers and family members, flexible-spending programs, and 401(k) plans with profit sharing and employer matches are just some of the generous offerings that come from these large companies -- especially those that win recognition as being great employers, such as Genentech
If you work for a small business, on the other hand, you may not be so lucky. According to a recent study from ShareBuilder, many small businesses make little or no provision for their employees' retirement. Even the owners of these small businesses often have no firm plan for their own retirement. Without a great deal of outside planning, small-business owners and employees therefore often face grim prospects for their financial futures.
Business owners in trouble
Unusually detailed and thorough, ShareBuilder's survey included responses from more than 500 small-business employers across the country. About a third of these businesses were sole proprietorships without any additional employees, while nearly all of the others had 10 employees or fewer.
In general, the smaller a particular business is, the less confident the owner feels about retiring. Among the business owners surveyed, only 15% feel very confident about their personal prospects for retirement. Nearly 60% of sole proprietors have little or no confidence that they're saving enough to retire. And relatively few owners have put employer-sponsored retirement plans into place at their businesses, even though they could personally benefit greatly from such plans. Only one in four business owners has a 401(k) plan in place, and a substantial number of owners have no retirement investments at all. Most of the rest of the owners resort to regular taxable mutual fund and brokerage accounts that have no tax advantages, while some use simpler retirement arrangements, including SEP-IRAs and SIMPLE IRA plans.
When asked about when they plan to retire, many small business owners said they simply don't plan to quit working. Many with a dozen employees or more foresee selling their business at some point in the future to finance their retirement, but more than half plan to retire either after age 65 or not at all, and another 20% have no concrete idea about exactly when they will retire. By not putting solid strategies in place for retirement, many business owners leave themselves no choice but to continue working indefinitely.
Employees without options
As small-business owners face uncertainties about retirement, employees of these businesses face even greater challenges. Nearly two-thirds of the small businesses surveyed offer no retirement benefits to their employees. However, figures from the Department of Labor suggest that the actual figure may be as high as 85%. Among these employers that do offer benefits, most are geared only toward giving employees a vehicle for putting in their own funds rather than having the employer add contributions. Only one in every seven businesses offers a 401(k) plan.
Part of the reason for this lack of retirement benefits is that small employers must choose among several other types of expensive benefits to attract employees. For instance, the survey found that if many small businesses without health-insurance benefits were to offer something additional, they would give higher priority to adding health benefits than they would to retirement benefits. Most small-business owners, especially those with very few employees, never even talk to their employees about setting up a retirement plan. They see retirement as a personal matter for employees to deal with by themselves.
Many business owners see 401(k) plans specifically as being too complicated and burdensome to establish. They may erroneously believe that they must offer a company match that they don't want to pay. Even though financial providers such as ShareBuilder are attempting to show business owners that such plans can be easier to establish and less expensive than they may think, the vast majority of owners who don't offer such plans expect that they will never do so, and many wouldn't reconsider even with substantial incentives such as additional tax breaks.
The lucky few
Signs are more encouraging among the minority of small businesses that do offer 401(k) plans. It's clear that once many owners get over the hurdle of establishing a plan, they strongly encourage employee participation through educational meetings, profit sharing, and company matching.
As businesses offer more benefits, competitors have to follow suit to obtain the best employees available. Yet retirement plans can also represent a type of "golden handcuff" that can deter employees from leaving a company. Because retirement plans allow employers to place vesting requirements on matching and profit-sharing contributions, employee retention may increase as employees want to stay at least long enough to have their retirement benefits vest.
For many small businesses and their employees, however, employer-sponsored retirement plans remain an unfulfilled dream. While government legislation and incentives encouraging additional participation in retirement plans may help, the vast majority of small businesses still place relatively low priority on retirement issues. If employers won't step up to the plate and sponsor a retirement plan, then employees need to lobby for plans themselves. Unless they succeed, employees will have little choice but to do what they can for themselves, even if an employer-sponsored plan would better meet their needs.
- Retirement Planning for Small-Business Owners
- Who'll Take Over When You Go?
- Let's Play Retirement Hardball
Whether you've just started your first job or are close to finishing what you hope is your last one, planning your retirement is always a good idea. The Fool's Rule Your Retirement service can help. Take a free look for 30 days, and see how it can help you.
Whole Foods is a Motley Fool Stock Advisor recommendation.
Fool contributor Dan Caplinger thinks having a business retirement plan is pretty cool. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is never risky business.