Why Working at a Small Business May Mean No Retirement Plan

Now that traditional pensions have all but disappeared from the private sector, workers often have to rely on employer-sponsored 401(k) plans to save for retirement. However, those at small businesses may not even have that option.

While 74 percent of those employed at businesses with 500 or more workers have access to a retirement plan, that percentage shrinks considerably to 52 percent for smaller businesses with 50 to 99 workers, according to a 2016 report from The Pew Charitable Trusts. And in businesses employing fewer than 10 people, a mere 22 percent of workers are offered an employer-sponsored retirement plan.

"Small businesses fail to realize how important retirement plans are to retention," says Vince Liuzzi, executive vice president and chief banking officer for DNB First. Here's why many small businesses fail to offer this valuable benefit to employees:

[Read: Workers Who Are Excluded From 401(k) Plans.]

Owners may not understand their options. Bruce Cacho-Negrete, vice president of investing for The Starner Group of Raymond James in Coral Gables, Florida, says federal laws make it difficult for some small business owners to provide retirement benefits. The government requires compliance testing to ensure the plan doesn't unfairly favor highly compensated or key employees. In small businesses where only a few workers choose to participate in the plan, it can be difficult to successfully meet the government's requirements.

However, there is a simpler alternative. Safe harbor 401(k)s allow employers to skip the complex compliance testing. Instead, small businesses simply need to either make plan contributions equal to at least 3 percent of each employee's income or offer a match worth at least 4 percent of employee compensation. "We are always big fans of the 4 percent match for safe harbor for our small business clients," Cacho-Negrete says.

Financial experts say small business owners don't always understand there is more than one 401(k) option. And not all small companies can afford to make employer contributions. Robertson says the cost of the required contribution or match can be a problem for some companies.

[See: How to Max Out Your 401(k) in 2017.]

Set-up costs and complexity. Even safe harbor 401(k)s, with their simplified rules, can feel overwhelming for business owners. "They view retirement plans as complicated," Liuzzi says. At companies where the boss is also the person answering the phone, updating the website and ringing up sales, learning how to set up a 401(k) takes a backseat to other concerns. "They are focused on day-to-day management," he says.

Owners may also overestimate the cost to set up and administer a plan. "They don't realize there are some super low cost solutions," says Stuart Robertson, president of Capital One Advisors 401(k) Services. Capital One offers a 401(k) plan specifically for small businesses, the Spark 401(k), which charges a $450 set-up fee for up to 10 employees and costs $80 a month to administer. Merrill Edge is another firm with a similar low-cost 401(k) option for small employers.

[Read: 5 New 401(k) and IRA Rules for 2017.]

Options for small businesses. Employees at small businesses without a retirement plan have a couple of options. Depending on the relationship between the worker and owner, Robertson says it may be appropriate to initiate a conversation about starting a 401(k) plan. Business owners may be more likely to investigate the possibility if they are hearing from valued employees that it's important.

If a 401(k) is not a possibility, "you absolutely need to be maxing out an IRA every year," Cacho-Negrete says. He advises opening a Roth IRA. Although there is no income tax deduction for contributions to Roth IRAs, the money grows tax-free and gains can be withdrawn tax-free after age 59 1/2. What's more, if workers get into a financial bind, they can withdraw their Roth IRA contributions at any time without penalty. "That's the beauty of a Roth," Cacho-Negrete says.

Working for a small business can have its benefits, but a retirement plan is often not one of them. Employees should understand the challenges facing their employer, and then make plans to save for retirement on their own.

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