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Small businesses: big employers but small retirement plans

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Brian Barling / The Christian Science Monitor

(Read caption) Retirement is inadequate for many small business owners and employees, according to two new studies.

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The SBA Office of Advocacy released two reports today related to retirement planing in small businesses.

The first report,written by SBA economist Jules Lichtenstein, looks at planning by small business owners for their own retirement.

The author's results offer substantial evidence for concern that business owners are not saving enough and that their retirement savings may be inadequate. Some of the findings:

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  • Individual-based (outside work) retirement account ownership, contribution activity and employment-based participation (at work) among business owners are low. IRA ownership rate for business owners is only about 36 percent, and only one-third of business owners with an IRA contributed for the 2005 tax year. Less than 2 percent of business owners own a Keogh plan. Only about 18 percent of business owners participated in a 401(k)/Thrift plan.
  • Business owners are more likely to own or contribute to retirement accounts if they are older, non-minority, educated, have more established business(es) (e.g., larger, older, profitable), and own more than one business.
  • Having a micro-business with fewer than 10 employees reduces the probability of an owner having a 401(k)/Thrift plan from 17.4 percent to 10 percent, all else equal.

A second study released by the SBA looks at employee participation in retirement plans in small businesses. Some of the highlights of this study, authored by Kathryn Kobe, included:

  • Almost 72 percent of workers in small companies have no retirement plan available through the company; an additional 9 percent have a company-sponsored plan available but do not participate. Only 19.5 percent of workers in small private sector companies report participating in a retirement plan.
  • Age, marriage, and educational attainment positively affect the likelihood of participating in a firm's retirement plan. This holds true for full-time and part-time workers.
  • Defined benefit plans are most likely to be sponsored by large businesses; almost 32 percent of workers in large firms report the availability of a DB plan compared to 25 percent of the workers in small businesses. Defined contribution plans are the type of plan most often reported by both groups. About 75 percent of small business workers and 70 percent of large business workers report that their firms sponsor such a plan.
  • One of the reasons why smaller firms may not offer retirement plans to their workers is the cost of setting up and running a retirement plan. Workers who do not participate in employer-sponsored plans frequently cite eligibility requirements and an inability to afford contributions as reasons why.
  • A number of government programs have sought to simplify retirement plans in order to encourage more small businesses to sponsor them. These efforts have met with limited success and come with a cost.

Given the increasing strains and questionable viability of social security going forward, both of these studies should cause concern given that 50% of Americans now work for small businesses.

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