Small Business Owners Can Improve Employee Retirement Planning
The personal savings rate, the index that measures how much Americans are tucking away for a rainy day, was relatively unchanged in the first half of 2017, but now a new study from the Pew Trusts reports that small business owners are also concerned about the number of Americans unprepared for retirement -- especially themselves.
Why are they worried, and what can savvy small business owners do to turn that problem around?
Let's go to the numbers. A recent Merrill Lynch study shows that 81 percent of U.S. workers surveyed "say they do not know how much money they will need to fund their retirement." Additionally, the report states, "Americans are saving only a fraction of what they think they should: 5.5 percent versus 25 percent of their annual income (after taxes)."
A separate study by the Insurance Retirement Institute notes that only 54 percent of baby boomers have retirement savings, the lowest recorded in the seven years of the report. Also, 33 percent of baby boomers believe they'll require annual income between $45,000 and $75,000 during retirement, but don't have nearly the amount of cash to cover those income demands in retirement savings.
[Read: 5 Ways to Turbocharge Your 401(k).]
"The big problem is that most people spend more time planning a two-week vacation than they do their retirement," says Avo Mavilian, a retirement specialist at Tailwind Financial Strategies in Houston.
Trying to change this behavior is difficult, Mavilian says, but there are remedies for small business owners to improve their employees' retirement savings habits.
"One of the more effective ways is a forced savings program of sorts," he says. "In the past, pensions were the preferred method, but they gave way to the 401(k) plan."
There are primary reasons why pensions went away. "First, employers wanted to shift the liability of funding to the employee," Mavilian says. "Wall Street realized that if they push 401(k)s, it would generate a large amount of new business."
Consequently, if you could figure out a way to limit the liability of the employer, you can encourage them to provide a "forced savings" of sorts, for their employees, he says.
Covering the emotional side of the employee retirement savings mindset can help turn the tide, as well.
"You've got loss aversion, where we typically care more about what we'll lose than what we could gain by saving," says Aaron Wassenaar, director of retirement services at Action Point Retirement Group in Grand Rapids, Michigan. "That's why employees are reluctant to save the recommended 10 percent of their salary and instead choose the less painful 3 to 4 percent. Loss aversion is also why so many people make bad investment choices even when they do sign up for a plan."
[See: 13 Ways to Take the Emotions Out of Investing.]
Another retirement savings roadblock is inertia. "This is why the majority of employees choose the most convenient routes -- target-date funds are an obvious example -- or do nothing at all," Wassenaar says. "Most people become so overwhelmed by the saving and investment decisions that go along with the process of enrolling in a retirement plan that they put it off for another day -- except that day never seems to come."
Add myopia to the mix, where workers just can't -- or won't -- imagine themselves 20, 30 and 40 years down the road, swaying somewhere on a hammock in the tropics, and it's clear that both workers and small business employers face an uphill climb in the retirement savings market.
But there is good news. There are specific moves business owners can take to get employees moving on retirement savings.
The first step is a basic but necessary one for small business owners -- offer a retirement plan. "Expenses for small retirement plans have been on the decrease in recent years," Wassenaar says. "There are several good low-cost 401(k) options available to small business owners. Employees are more likely to participate in a workplace retirement plan than trying to save on their own."
Another incentive producer is auto-enrollment. "If small business owners automatically enroll all workers in retirement plans -- with the option to opt out later if they want -- employees wouldn't have the chance to procrastinate on their retirement savings," Wassenaar says.
Couple that move with automatic contribution increases, and small business owners are really generating some momentum. "Automatic escalation can help encourage employees to increase their contributions over time," he says. "Research shows that the automatic escalation of savings rates may be the most important factor in building longer-lasting retirement savings."
Other good ideas include company matches, where employers match 401(k) worker contributions up to a certain contribution percentage, limits on 401(k) loans and the use of target-date funds and risk-based funds as an option for novice investors, says Michael Houghton, founder of Houghton Financial Partners, in El Paso, Texas.
Yet all those features, as helpful as they are, won't mean much if employees don't understand how retirement saving really works -- and that's where education can be important.
"Small business owners should make sure employees understand the company match, tax deferral, tax-free growth, compound growth and investments," Houghton says. "Employees want somebody who will answer questions, help them understand all the options and explain the associated risks."
The challenges are numerous. Clearly, getting small business employees going on retirement savings is a problem that demands a solution.
"Sixty-seven percent of small businesses don't offer retirement plans," says Chad Parks, CEO of Ubiquity Retirement + Savings, in San Francisco. "With Social Security due to become insolvent by 2034 and the fact that nearly half of Americans have less than $10,000 in personal savings, people are bound to be working way past the age of 65."
[See: 10 Skills the Best Investors Have.]
With those challenges in mind, it's crucial for small businesses to realize that creating a retirement program for their employees does not have to be a huge expense, Parks says. "Business owners merely have to set up a plan and let employees take advantage of it."
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