Workers at small businesses often miss out on pension plans

PERSONAL FINANCE

May 21, 2000|By EILEEN AMBROSE

Often the most effective way to save for retirement is through a plan at work, but millions of employees at small businesses are missing out.

About 19.8 million full-time workers at private companies with fewer than 100 employees were not covered by a retirement plan in 1998, according to the latest U.S. Labor Department figures. In some cases, employers don't offer a plan; in others, workers just don't participate.

"The fallout is that you have a heavy concentration of low-income Americans working for small employers. What this generally leads to is that the only source of income they end up with in retirement is Social Security," said Dallas Salisbury, president of Employee Benefit Research Institute in Washington. "And Social Security was designed to be a floor income, not an adequate income." The federal government has tried to make retirement planning for small businesses easier, hoping it would spur employers to offer plans. Financial firms also have begun focusing on creating plans for small companies, experts said. Still, hurdles remain.

Small employers said one of the main reasons they don't offer a retirement plan is workers aren't demanding it, preferring cash or other benefits instead, according to a recent EBRI survey. Companies also said it didn't make sense to set up a plan because of high turnover and a high number of seasonal or part-time workers.

And there are financial obstacles. Many companies said they are just getting started and revenues are too uncertain for them to commit to a plan.

Falco Benfield, owner of F&S Printing, knows the challenges. He started his printing business eight years ago out of a garage and now employs about 10 workers at his Severna Park office. After a benefits specialist visited the company a few years ago, some employees asked for a retirement plan.

Benfield agreed to set up a plan where the company would match workers' contributions to a retirement account. But when he came close to launching the plan, workers - particularly younger ones - backed off, not wanting to see their take-home pay reduced, he said.

"People aren't banging on my door, `Can we get this?' " Benfield said. "They'd rather have [the money] right now than wait. That's the mentality of all America right now."

Salisbury predicts that that will change. With Social Security sending workers estimates of future benefits, employees will see they will need more money for retirement and begin demanding a plan, he said. In today's tight labor market, businesses will likely respond.

More small companies will offer retirement benefits once their businesses are firmly established or are acquired by bigger companies that provide plans, he said.

For employers considering adopting a plan, a place to start is the Pension and Welfare Benefits Administration's Web site at www.dol.gov/dol/pwba. (Click on the Small Business Retirement Savings Program.)

The best plan for a small business depends on income, potential tax breaks, number of workers and how much the employer is willing and able to contribute on behalf of employees, said Mark Jeanblanc, supervisor in retirement client services at T. Rowe Price Associates in Baltimore.

The most common plans among small employers are 401(k), Savings Incentive Match Plan for Employees (SIMPLE), Simplified Employee Pension (SEP) and profit-sharing, experts said.

Generally, employers can deduct their contributions to plans, and the funds in them grow tax-deferred until withdrawn by workers. The plans also carry penalties if workers make early withdrawals.

Many small employers are aware of 401(k) plans and that's often the first option they look at, experts said. With a 401(k), employers don't have to provide a match. Workers each year can contribute as much as 15 percent of their salary, up to $10,500.

This type of plan requires more paperwork than some others, such as filing a tax form each year and testing to make sure that it isn't biased in favor of higher-paid executives, experts said.

A 401(k) costs about $2,500 a year to administer, which often causes small firms to back off from this option, said Carole Smith, marketing manager of small business retirement plans at Price.

A cheaper, easier plan is the SIMPLE, created a few years ago for businesses with 100 or fewer workers. The plan usually costs nothing to set up and requires little paperwork, experts said. A SIMPLE is often set up as an IRA, although it can be a 401(k).

But simplicity comes at a price: employers must make a contribution on behalf of workers, said Fred Shapiro, a pension consultant in Owings Mills.

Companies have two options under a SIMPLE IRA: Match dollar-for-dollar up to 3 percent of employees' compensation, although two out of five years the match can be less. Or, they can put 2 percent of salary into the plan for each eligible worker, even those not contributing on their own, Shapiro said.

For their part, employees can contribute up to $6,000 each year.

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