Millions of Americans have used 401(k) plans to save for retirement, but one significant segment of the workforce has long struggled to gain access to these plans: employees of small businesses. Thanks to a spate of new and potential legislation in states like California, Oregon, Illinois, and others, that could soon change.
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"If you work for a small business, the probability that you have a 401(k) available to you is really lousy," says Craig Howell, vice president of business development for Ubiquity, which provides 401(k) services mainly to small businesses. "Somewhere in the vicinity of 10 percent of small businesses have a 401(k) or retirement plan of any variety."
According to Forbes, more than 50 percent of the working population in the U.S. works for a small business, which means tens of millions of Americans lack access to employer-supported retirement plans.
"States have taken notice of this in recent years, so they have begun in a handful of instances to examine a mandate of one variety or another to require businesses to either offer a private plan or a state-sponsored product," Howell says.
These mandates could spell major change not only for the small businesses that will be required to follow them, but also for the retirement industry itself.
"The 401(k) industry has ignored the small business world for a very long time, because small businesses don't have the ability to gather assets at any appreciable rate to make it worthwhile, at least for the legacy 401(k) industry," Howell says. "It has been a long-neglected market. Now that there are mandates, the retirement industry is taking a long, hard look at what's going on ... and whether it should come up with products that are suitable for the small business community in a way in which we haven't before."
The Oregon Example
While there are many states that have passed legislation, are considering legislation, or are investigating possibilities, Howell says that Oregon is currently the farthest along in the process. It makes sense to look at what is happening there to get a glimpse of what the future may hold for small business owners elsewhere.
In Oregon, a new law requires businesses of at least two employees to provide retirement plans. A phase-in period of 2-3 years starts in June 2017, and in that time, some 60,000 small businesses will have to respond to the mandate.
Affected employers can choose between offering a state-sponsored product or a private retirement plan that is covered by the Employee Retirement Income Security Act (ERISA). This includes plans like 401(k)s, simplified employee pension plans (SEPs), and SIMPLE 401(k)s. (More information about these plans can be found on the U.S. Department of Labor website.)
According to Howell, response from the small business community has been a "mixed bag."
"On the one hand, nobody likes to be told what to do; on the other hand, it's hard to agree that saving for retirement isn't a lofty goal," he says. "People, to a certain extent, resent having to act, but having to act in this case is probably beneficial in the long run, as long as you don't overburden businesses with administrative functions in the meanwhile."
The state-sponsored product in Oregon will be a payroll deduction IRA. Businesses will have to make deposits via salary deferrals to IRA accounts for their employees. These plans will be exempt from ERISA, which means, in part, that they won't have to adhere to the fiduciary responsibility rules put in place by the act.
The second option for businesses in Oregon is to offer 401(k) plans through the private marketplace. Howell sees benefits to this course of action, including:
- the greater flexibility of 401(k) plans;
- higher contribution limits than IRAs, which means more tax advantages;
- and the opportunity to retain employees by offering a company match to their deposits.
Given these benefits, Howell believes many employers will go the 401(k) route.
"We think that there will be a subset of employers who, rather than going with the state-sponsored product for whatever reason, will gravitate toward an ERISA plan offered by a private a provider," Howell says.
Keep an Eye on California, Too
While California's mandate is not as far along as Oregon's, Howell believes small businesses should pay attention to what is happening in The Gold State. Because of the prominence of California's economy and the size of the state, there's good reason to believe other states will take a page from its book if and when they begin enacting similar mandates.
"As California goes, others watch," Howell says.
ERISA? IRA? 401(k)? Oh my!
Did all the financialese in this article leave you scratching your head? Us, too. Here are a few links for additional reading:
"The First Step to ERISA Compliance? Choosing the Right Retirement Plan" by Lisa Chui in Corporate Compliance Insights
"401(k) Plan: What It Is and How to Choose One" by Jennifer Post in Business News Daily
"Traditional Vs. Roth IRAs: Which Is Right for You?" by Andrew Meadows at Ubiquity's blog