A recent survey of U.S. small business owners (SBOs) reveals contradictory views on the retirement preparedness of the country’s workers – yet offers an optimistic economic outlook for the next two years.
An overwhelming majority of SBOs believe that the country is in the midst of a retirement crisis. The online study, commissioned by Nationwide and conducted by Harris Poll, found that 84 percent of small business owners believe American workers are facing a retirement readiness crisis. However, 60 percent of SBOs believe that their own employees are on track to retire.
Nearly two-thirds (63 percent) of small business owners say it’s important for a business owner to provide retirement benefits, but, in reality, only a third (34 percent) of small business owners offer these benefits to their employees.
Small businesses play an outsized role in helping workers prepare for retirement. Consider this: According to the U.S. Small Business Administration, small businesses make up 99.7 percent of all employers, employ nearly 50 percent of all private-sector workers (48.5 percent) and create 63 percent of the net new private-sector jobs in the country.1
“Small businesses are the lifeblood of our economy and keep our communities moving forward,” said Joe Frustaglio, vice president and leader of private sector retirement plan sales at Nationwide. “All workers deserve access to retirement savings options, and it is evident that we’ve reached a point in this country where people are starting to pay attention to the fact that a retirement savings problem exists. Employers need to provide access and education, and workers need to take advantage of what’s available to them.”
Help is on the way
Workers should have hope that their retirement-readiness outlook will improve. Of the SBOs who offer retirement benefits, including 401(k) plans, to their employees, 67 percent say they plan to increase their company contribution to employees’ 401(k) plan. Of the SBOs who do not currently offer retirement benefits, 30 percent say they plan to offer these benefits in the future. If that happens, then more than half (54 percent) of SBOs will offer their employees retirement benefits.
A positive economic outlook is a driving force behind this. Half of SBOs who plan to start offering retirement benefits say they will do so because they expect sales or revenue to increase in the next 12 to 24 months (50 percent), and 32 percent believe the U.S. economy will improve in the same timeframe. Small business owners who currently offer 401(k) plans and say they will increase contributions have an even more positive outlook: 56 percent expect company sales or revenue to increase in the next 12 to 24 months, and 53 percent believe the U.S. economy will improve in that same period.
“In spite of recent market volatility, economic indicators are pointing toward continued growth for the U.S. economy in 2016,” said David Berson, senior vice president and chief economist at Nationwide. “Small business owners should see Main Street benefit from the economic stability that we’ve enjoyed during the last few years.”
Affordable Care Act: making its impact
The Affordable Care Act (ACA) is indirectly affecting workers’ retirement preparedness.
Of SBOs who plan to offer retirement benefits in the future, 25 percent say the ACA has made health benefits less attractive to employees, and 18 percent say the ACA has decreased company health care costs. Of SBOs who currently offer retirement benefits and plan to increase company contributions to their employees’ 401(k) plans, 33 percent say the ACA has made health care benefits less attractive to employees, and 30 percent say the ACA has decreased the company’s health care costs.
“Lower health care costs means small business owners have the option of contributing more to their employees’ retirement,” said Frustaglio.
As the ACA makes health care benefits less relevant to small business employees, business owners have to find a new way to recruit and retain employees. There is mounting evidence that 401(k) plans are filling that role.
Among small business owners, 59 percent disagree that retirement benefits are not important for attracting and retaining employees. More than two in five (42 percent) of small business owners who said they plan to increase contributions agree their company’s 401(k) plan is now more important for attracting and retaining employees as a result of the ACA. Similarly, about one-quarter (24 percent) of small business owners who will offer retirement benefits in the future say their company’s 401(k) plan is now more important for attracting and retaining employees because of the ACA.
“As the health care insurance marketplace becomes more commoditized, employers are looking for new tools to attract and retain key employees,” said Frustaglio. “Employers who are using 401(k) plans as a recruitment tool are ahead of the game because we’re seeing more company owners asking how they can do this.”
Access to 401(k) plans
Small business owners who are not currently offering a 401(k) plan to their employees should talk to a financial advisor about finding a plan that’s right for their employees and business. A vast majority, 80 percent, of small business owners say they cannot compete with a Fortune 500 company’s benefits, and nearly half, 48 percent, feel they could afford a customized 401(k) plan to meet their small business needs.
“Small companies not being competitive with large corporations in terms of employee benefits is just not true in today’s world,” said Frustaglio. “No matter the size of the business, from one with 33,000 associates like Nationwide to the corner grocery store, today’s 401(k) plans allow for customization and access to the same options with the same tools for all employees.”
Frustaglio recommends that small business owners who already offer retirement benefits to their employees should do a plan review every year with their advisor. The review should include an analysis of the plan’s components and investment options for their employees.