The Key to Fixing America’s Savings Crisis

Savings plans at companies with fewer than 500 employees lag larger plans in almost every way.

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If we’re ever going to solve the retirement savings crisis in America, something must be done to beef up tax-advantaged savings plans at small employers.

Companies with fewer than 500 people on their payroll employ 55 million workers—filling about half of all private-sector jobs, according to Transamerica Center for Retirement Studies. Yet the savings plans at these companies rarely measure up to those offered by big employers.

Small companies are less likely to offer a 401(k) or similar plan—just 79%, vs. 95% of large companies. Those that do offer a 401(k) plan tend to have fewer plan features, according to findings in the center’s 14th annual retirement survey. For example:

  • Matching contributions This is a key feature in terms of attracting plan participation. Just 70% of small companies with a plan offer a company match while 86% of large employers offer one.
  • Automatic enrollment Plans that automatically enroll eligible employees (while giving them the option to opt out) have been widely credited with boosting participation rates. Small companies are far less likely to have this feature as a part of their plan—just 19% vs. 43% of large companies.
  • Hybrid funds “One decision” Target-date funds and strategic allocation funds have become popular options in the retirement plans that offer them. These funds give you professional management that is tailored to your retirement date and risk profile. Just 47% of small companies offer hybrid funds in their plans, vs. 79% of large company plans.

The result is predictable. Workers at small companies generally have saved less for retirement. The median nest egg for boomers working at a small company is $92,000, vs. $113,000 for those at large companies, Transamerica found.

Another gap is the relatively few part-time workers who are eligible for a 401(k)-type plan. At small companies, only 36% of part-time workers are offered a plan, vs. 68% of full-time workers. This gap exists at large companies too. “A key to expanding coverage among workers of all company sizes is encouraging existing plan sponsors to extend eligibility to their part-time workers,” Catherine Collinson, president of the Transamerica Center, recently told a congressional panel.

She also recommended that congress target small companies through additional tax incentives, pooled plans that cut overhead by joining multiple employers, and allowing employees to take their plans with them when changing jobs, in order to boost the number plans offered and participation rates.

The retirement savings crisis is real, and especially acute among workers at small companies.

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