Employee pension plans have been hit as the pandemic has forced workers to focus on immediate financial concerns rather than long-term savings, but for some employees — especially those working for small businesses — the idea of a financially secure retirement was never a guarantee.
In the United States, of the 5.8 million small businesses – those with 100 or fewer employees – 90% do not offer their employees a 401(k), according to a study by Guideline, a savings platform. retirement for small businesses. Of the 42 million employees working for small businesses, 75% have no access to any pension plan.
“There is a systemic problem in the way our retirement savings vehicles have changed over the past 30 years,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings, a 401(k) provider for small businesses. “Pensions are gone and 401(k)s have replaced them, but we haven’t taught people what it means to be a good saver, or to be able to make investments, or to be able plan your personal financial future.
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This fundamental lack of education can lead small business owners to believe that they are unable to help their employees retire comfortably. Offering a full-fledged 401(k) might be too much of an investment (and work) for a small business, Parks says, but there are other ways these employers can help employees secure a financially stable retirement.
Options include a payroll IRA or an employee savings incentive plan – also known as a SIMPLE IRA – which allows small employers and employees to contribute to a traditional IRA as a sort of start-up pension plan if the employer does not offer a sponsored plan. Employers can also participate in a joint employer scheme, a new type of retirement savings plan which was created by the SECURE law. It allows employers of different sizes and from all industries to work under a single plan that will bear the brunt of the administrative burden for the group of employers.
“It really depends on employee savings needs and how complex or simple a company is looking for,” Parks says. “In any case, if the company is in a state with a mandate, all of these types of plans would satisfy that.”
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As of December 2021, 14 states have enacted mandates that require employers to provide employees retirement savings plans. In California, businesses with five or more employees must offer a plan or face a $250 fine per eligible employee; the fine doubles to $500 per employee after 180 days of noncompliance, according to Vestwell, a 401(k) platform. Other states, including New Jersey, have similar requirements and fines for employers.
“A lot of states have started looking at the lack of retirement savings for small business employees, and they know that’s going to be a societal issue, because all of those people are going to be underprepared for retirement, and then they’re going to start shooting social services,” Parks says. “In 2022, more state warrants will come online, and you’re going to see [small businesses] finally start moving in that direction. Deferring a portion of a paycheck to a retirement account is truly the most efficient way to fund retirement.