Why Do Some Small Businesses Offer Retirement Plans?

At any given time, only about half of private sector workers in the United States are covered by an employer-sponsored retirement plan, and few workers save without one. As a result, many households end up with no retirement saving and entirely dependent on Social Security, while others move in and out of coverage throughout their careers and end up with only modest balances in a 401(k) account. Numerous studies have shown that offering a retirement plan is closely related to firm size; firms with fewer than 100 employees are much less likely to offer a plan than larger firms. As a result, observers tend to dismiss small firms as a source for future growth in coverage. In fact, though, a meaningful share of small businesses do offer retirement plans. This brief, which is based on a recent study, attempts to identify the characteristics of sponsoring firms and their employees to determine which small businesses may be more likely to offer a retirement plan in the future. The discussion proceeds as follows. The first section describes the limited information available from data sets that focus on the firms. The second section summarizes the information about firm coverage that can be gleaned from nationally representative surveys of employees. The third section explores why many small firms do not provide coverage. Surveys suggest that financial uncertainty and lack of employee interest are real hurdles. Respondents also suggest that plans are too costly, but companies are often either poorly informed or misinformed about costs. The final section offers a two-step agenda. First, the nature of plan costs should be clarified and publicized. Second, the most comprehensive survey dates from 1998, so a new survey would be invaluable.