SMBs retirement savings options are lagging: Here's how to fix it

According to new data from AARP, 57 million employees in the U.S. currently work for an employer that doesn’t offer a traditional pension or retirement savings plan. Although this is a concerning statistic, it’s not all that surprising. Individual financial independence and saving for the future is a commodity that is in short supply with the working class in this country. More importantly, there’s a lack of understanding and experience to put money away for the “golden years.”

In fact, only 36% of non-retired adults think their retirement savings are on track, according to the Federal Reserve. Meanwhile, a separate Harris Poll survey released last December reported that over a fifth of the more than 2,000 adults canvassed save nothing each year for retirement.

One group of employees that is disproportionately impacted by the above is small business employees. And to back this up, all we have to do is revert to AARP’s findings, which also found that 78% of workers at companies with fewer than 10 employees and 65% at companies with 10 to 24 employees lack access to a pension or retirement plan. The impact becomes evident when you consider that nearly half of all Americans are employed by small businesses.

RELATED: Narrowing the SMB retirement savings gap

There is little doubt this is a national issue that needs attention. After all, pension savings can substantially impact the economy, fueling growth by opening up more consumer funds for investment. Additionally, the more money American retirees have in their bank, the less financial pressure there will be to support an aging population lacking sufficient retirement income.

But how do we bridge this gap? Here are just three suggestions to give small business employees vital access to a retirement savings plan.

1. Leverage technology to make it easier for digital-natives to opt-in.

Just as fintech innovations are transforming traditional banking by enabling consumers to invest, make payments, and manage their money on their phones, we need to utilize technological innovations in the retirement industry to expand access to flexible 401(k)s for both plan sponsors and participants.

Fintech solutions entering the market today can make it easier for small businesses to design and offer a 401(k) plan that serves the needs of the company and its employees. Using automation and advisors-on-demand offerings, they can cost-effectively hurdle many complex pain points that have prevented plan administrators from managing tasks, like tracking participant eligibility, ensuring compliance, and streamlining regulatory notices and disclosures. We must find ways to get these features in the hands of all small business owners and employees.

The use of technology can also expand access to retirement plans for those most reluctant to opt-in: millennials and Gen Z workers. Despite this age group’s financial maturity, they’ve been particularly insecure about the viability of 401(k)s. The evidence? According to Fidelity data, less than 16% of Gen Z workers currently participate in a 401(k). Meanwhile, another study from Schwab found that a third don’t even feel like they are on top of their 401(k) options, and half wouldn’t know what investments to choose for their 401(k) to have enough for retirement.

Engaging millennials and Gen Z through technology could incentivize them to opt-in or, at the very least, educate them through familiar mediums on their options. Considering this generation is already behind their parents when it comes to what is available to them for saving for retirement, increasing participation is a reasonable goal, especially for those within small businesses. This notion of expanded technological options goes beyond just workers, as millennials and even Gen Z move into small business ownership and management and are increasingly responsible for employee benefits.

2. Take advantage of government support to democratize 401(k) access.

Previous studies have found that many small and mid-sized businesses don’t offer 401(k)’s because they believe their business is too small to qualify for one. About a third of SMBs say that they wouldn’t be able to afford to match contributions if they did offer their employees a retirement plan, while an additional quarter believe they are too costly to set up and manage.

The truth is, these business owners are probably right if they’re only considering legacy providers. It has traditionally been challenging for SMBs to afford to offer their employees any worthwhile retirement plan. It’s not just small business employers hit by unsustainably high costs. According to Morningstar Center for Retirement and Policy Studies data, workers who save in a 401(k) plan offered by a small business pay fees that are twice as high as those paid by employees who work at the largest companies in the U.S.

Given how high the stakes are, it’s perhaps imperative that Congress continues to exert its influence by improving regulations that scale 401(k) access. They are currently attempting to do this through SECURE Act 2.0, which, if passed, could prove to be a boon for SMBs and their ability to offer employees retirement security. (The first Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, was passed in 2019.) It provides small businesses with fewer than 50 employees significant tax credits for enrolling workers. Meanwhile, its proposed Starter 401(k) removes nondiscrimination testing so even the smallest SMB can offer something to employees.

SMBs would benefit significantly from SECURE Act 2.0 should it come out the other end and perhaps spur further regulations that would improve SMB workers’ ability to achieve greater financial freedom.

3. Turn financial advisors into SMB retirement advocates.

Advisors are also critically important to the 401(k) business model, possessing the ability to foster positive participant outcomes and instill high levels of confidence in clients about their benefits. In 2021, 38% of Americans worked with a financial advisor, representing a reasonably significant portion that could be influenced to either opt-in to their small business employer’s retirement plan or offer one to their small business employees.

However, while technology is helping open the door to retirement for more small business employees, it’s also turning off some of these advisors that should be advocates as they worry that fintech could replace them. Therefore, small business plan providers must focus on providing innovations that extend what the advisor can do and further enable them to undertake a twofold mission. Firstly, help solve this retirement plan access gap for small businesses and their employees, and secondly, leverage technology to impact client outcomes successfully.

Undoubtedly, helping all employees of small businesses save for retirement is a noble mission and one that, if achieved, would leave an indelible mark on American society and its economy. Ultimately, the workers most impacted by a lack of retirement savings options are low to middle-income workers, with 43% of U.S. small businesses located within low-income communities. This demographic is also the group left behind by many of the tax breaks associated with 401(k)s today that often skew towards helping high-income earners.

Although much-needed retirement legislation is finally back on the congressional schedule, it will likely take more collective effort to equalize access to practical retirement benefits across all business types.

Jared Porteris is co-founder of 401GO.