Imagine going to work and not having a work sponsored retirement plan like a 401k or IRA. Unimaginable right? Employers are already doing away with pensions and Social Security doesn't pay much. To not have anything may jeopardize an employee's financial future.
It turns out about 50% of Americans work for small businesses, but only 31% of small businesses provide retirement plans according to the U.S. Small Business Administration (SBA).
The SBA’s definition refers to companies with fewer than 500 employees, while other sources use 100 or fewer. Regardless of how you define small business, it’s clear that millions of Americans are on the outside looking in when it comes to retirement planning.
Here’s a chart that gives you an idea of how much rarer it is to get retirement benefits at small companies compared to well established companies with over 1,000 employees.
As an entrepreneur, I can relate to the many operational challenges that small business owners face. The very first year of launching my business after leaving my old employer, I didn’t set up a retirement plan, like a Solo 401k or SEP IRA, because that was the last thing on my mind. I had to make some revenue first! Furthermore, I was too lazy to figure out how to set it up.
There’s a lot of pressure to juggle multiple hats while on a tight budget. Government filings, processing payroll, paying taxes and keeping track of expenses will take up a lot of your time.
Minimizing operating costs is paramount for survival. After all, wouldn’t an employee rather have a job with no retirement plan, than no job at all? Small businesses don't prioritize setting up retirement plans because sometimes they are just struggling to stay afloat. But once the revenue starts coming in, creating a retirement plan for employees is a good way to retain and attract new talent.
Always ask your potential future employer what their retirement plan is before hopping aboard!
SMALL BUSINESSES RETIREMENT PLAN WOES
Here are the disappointing statistics about small businesses and retirement plans:1
* Nearly 50% of Americans work for small businesses (fewer than 100 employees).
* Only 5% of very small businesses have retirement plans (1-4 employees).
* Just 31% of small businesses provide retirement plans (26-100 employees).
* Only 14% of small businesses offer 401(k) plans compared to 89% of large corporations.
* $15 billion in retirement savings is lost each year in the small plan market due to unnecessary fees.
* Roughly 77 million Americans don’t have employer sponsored retirement plans.
Most Americans, even those with access to retirement plans at work, don’t save anything for retirement. It’s no wonder that with the average Social Security benefit at only $15,700 a year, 82% of U.S. workers fear they won’t have enough to survive past their 60s according to the Employee Benefit Research Institute.
Those who do save typically aren’t saving enough either. Exorbitant healthcare costs can wipe you out if you’re unprepared. According to Fidelity, retired couples can spend over $220,000 on healthcare alone and that’s excluding the cost of long-term care. Heck, I spend $17,400 a year on healthcare for two healthy 30-something year olds.
I hope more companies start offering 401(k) plans because even without matching one can accumulate a sizeable nut if you take advantage of the maximum contribution amounts each year. Take a look at how much you could save in a 401(k) if you max it out every year:
Add on company matching and the results are even better. After 10 years, I accumulated over $300,000 thanks to diligently maxing out my 401k every year and receiving a gracious company matches. Although the money can't be touched until age 59.5, it's good to know it's there if I need it.
WHY ARE 401(k)s SO RARE AT SMALL BUSINESSES?
It turns out setting up a 401(k) plan is more complicated than you may realize. There are a lot of fees, paperwork, government forms, setup costs, and fiduciary responsibilities that typically come with setting up a corporate 401(k) plan.
Here’s a quick rundown of why a lot of small businesses have shunned 401(k) plans and why they are at a disadvantage to large firms.2
* Small business participants can lose 1-2% in annual plan fees compared to less than 0.5% for large corporation employees.
* Retirement plans with under $10 million in assets typically aren’t able to offer low-cost index funds to employees that don’t require active management.
* Many retirement plan providers entice small businesses with low up-front fees but continually raise fees over time as employees’ savings increase.
* Due to the Employee Retirement Income Security Act (ERISA), the U.S. Department of Labor places a lot of fiduciary responsibilities and requirements on employers that are time-consuming and confusing for small business owners to figure out.
FINTECH RETIREMENT PLAN SOLUTIONS FOR SMALL BUSINESSES
Employees take on a lot of risk working for small companies or at a start up, and employers can struggle with recruiting and retaining top talent. Even if you’re able to join a small business that offers a decent benefits package, chances are it’s nowhere near as attractive as those offered at large corporations. To add insult to injury, small businesses often cease to exist after five years.
With practically every other person in the U.S. working for a small business, we need easier and more affordable ways for small-sized companies to provide retirement plans.
This is where I stumbled across ForUsAll, a ~50 employee fintech company based here in San Francisco that is shaking up the small business retirement space.
ForUsAll was formed in 2013 by five co-founders: Shin Inoue (CEO), David Ramirez, Dave Boudreau, Cindy Bloch and Sergey Zelvenskiy. They raised $3.3 million in seed funding from Silicon Valley VC firm Foundation Capital and several individuals in fintech including Blake Grossman (Barclays Global Investors’ former CEO) and Joshua Levine (former CTO of E*TRADE).
“We have one simple goal at ForUsAll: to make sure that every American has a fair shot at retirement success no matter how small the company they work for or own,” said CEO Shin Inoue. “To accomplish that we challenged ourselves to radically simplify the 401k so that it works for any small company and its employees.”
Here are some benefits of using ForUsAll as a small business owner:
Increasing access and usage. Employees of small businesses who are lucky enough to have access to a 401(k) are often not using them because enrollment is cumbersome. ForUsAll is changing this by using automation and plain English that employees can understand.
Setup is free and uncomplicated. Employers don’t have to worry about forking over a hefty startup fee, typical with traditional plans. ForUsAll also handles all the paperwork hassles and government forms.
ForUsAll takes on the fiduciary role. This is a huge plus for small businesses that typically lack the resources and knowledge to figure out and meet the requirements of the Department of Labor.
Payroll integration and full-service plan administration. ForUsAll easily connects with popular cloud-based payroll systems like Zenefits and ZenPayroll (Gusto). Contributions are deducted automatically and new employees are added when eligible.
High participation and savings rates. ForUsAll boasts over 90% employee participation compared to 74% in the overall small-plan segment. ForUsAll participants are also saving 10% on average compared to the market rate of 5.6%. They also use technology to help employees make financial decisions on managing debt, saving for emergencies and utilizing HSAs.
Fixed monthly fees for employers. Small employers pay a fixed monthly rate of $94/month for the first 10 employees. Each additional employee up to the 40th is an extra $5/month and then down to $3 for the 41st employee and up.
Low-fees for employees. Most small-plan employees pay 1-2% in fees, but those who use ForUsAll pay 0.54% or less.
Vanguard funds. Currently, ForUsAll exclusively offers Vanguard funds, the lowest cost funds in the industry. New plan participants are automatically invested in age-appropriate target-date funds at a rate of 6% by default and in 1% contribution increases each year up to 15%. This can be modified of course.
#401cake. Every new employer that signs up with ForUsAll gets a free “401cake” to share around the office. It’s a small gesture that gets people to smile. Who doesn’t love free food?
HOW MUCH ARE YOU SAVING FOR RETIREMENT?
Those of you who are regular Financial Samurai readers know that everything starts with savings. Based on my previous polls, 23% of you save over 50% of your after tax income every month. Meanwhile, roughly 40% of you have over $201,000 in your 401k or IRA.
If your employer doesn’t offer a retirement plan, ask them to start one. If they refuse, ask them why not given there are companies now who are making things cheaper and easier to set up. And if they still refuse, perhaps it's time to look for a new job in secret. Tax-advantaged retirement savings add up over time!
Another interesting employer retirement plan brought up by a reader is the SIMPLE IRA. The annual fees to set up are low, but you can only contribute up to $12,500, and the employer can only contribute up to 3% of your salary vs. a 401k where an employee can contribute $18,000 a year and an employer can contribute 25% of salary for a total of up to $53,000. You must have 100 or fewer employees and you cannot maintain any other employer-sponsored retirement plan.
Wealth Building Recommendation
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1 Data sourced from the Employee Benefit Research Institute, U.S. Government Accountability Office (GAO), U.S. Small Business Administration, and Deloitte.
2 Data sourced from WSJ, BrightScope, Fidelity, U.S. Department Of Labor.