Why Small Businesses Don't Offer Retirement Plans

Small companies generally provide high-cost retirement benefits, if they offer them at all.

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You're much more likely to be offered retirement benefits if you work for a large company rather than a smaller one. According to recent Government Accountability Office testimony, only 14 percent of small employers with fewer than 100 employees sponsor a plan in which workers can save for retirement. Here's why you probably won't get access to a retirement account if you work for a small business:

Too small. The smallest businesses are the least likely to offer retirement benefits. "In their initial years of existence, many small businesses are fighting for their survival and do not have the stability or resources to establish a retirement plan," says Paula Calimafde, chair of the Small Business Council of America. "Once small businesses survive their initial period of uncertainty, they are in a much better position to offer benefits and are much more likely to establish a plan."

[Read: 4 Retirement Plan Options for Small Businesses.]

Only 5 percent of companies with four or fewer employees offer a retirement plan, compared to 31 percent of companies with between 26 and 100 employees, GAO found. That's considerably less than the approximately half of private-sector workers who have access to retirement benefits at work. "If they have just started and they don't have a lot of funds, they simply may not be able to provide those types of benefits until they become financially stronger," says Charles Jeszeck, director of education, workforce and income security at the GAO.

A recent Wakefield Research and Capital One ShareBuilder 401(k) online survey of 500 business owners at companies with 50 or fewer employees found that more than half don't offer any retirement benefits, often because they don't have "enough employees to make it worthwhile" (48 percent) or that business is too uncertain (11 percent).

Low pay. Small companies with low wages are the least likely to provide workers with retirement benefits. Only 3 percent of small employers paying average wages of under $10,000 had a retirement plan for employees, versus 34 percent of small employers paying workers an average of $50,000 to $99,999 annually. Some small business owners don't offer a 401(k) because their employees are mostly short-term (11 percent), according to the ShareBuilder 401(k) survey.

[Read: How to Save for Retirement on a Small Salary.]

Investment selection. Small employers told the GAO that they find selecting investment options for employees to be challenging, especially if their workforce includes both younger and older workers. "Retirement plans add an unknown risk because the owner doesn't understand how plans work, which plan to use, how much they cost, what the benefits of a plan are, what the disadvantages are or in many cases, how to start one," says Bryan Fiene, a senior vice president at Robert W. Baird and Co. "Many businesses simply decide that it's not worth the hassle, risk or cost to start a plan."

Small companies don't always want to take on the responsibility of helping employees to prepare for retirement or deal with all the paperwork. "A lot of businesses have difficulty with the rules. They are afraid of the liabilities of operating a plan and whether they know all the duties that they have to perform," Jeszeck says. "There is so much choice that it can be very confusing."

Fees. Large 401(k) plans can negotiate for low fees, but small employers lack that bargaining power because they generally have less money in the plan. Participants in small plans often pay higher recordkeeping and investment management fees than workers in larger plans. A 2012 GAO survey of plan sponsors found that workers in plans with fewer than 50 participants paid an average of 0.43 percent of their plan assets annually in fees, while participants in larger plans with more than 500 participants paid about half that amount (0.22 percent) for recordkeeping and administrative services. Participants in small plans also paid significantly more for consulting and advisory services to help the employer with their plan responsibilities (0.29 percent) than workers in large plans (0.07 percent). Almost a quarter of the respondents (23 percent) in the ShareBuilder 401(k) survey said they don't offer a 401(k) plan because they can't afford to offer a company match, and 12 percent said management fees are too high.