People who work in a small business now have a better chance of pension security

By Jessica Hall

Small businesses are getting a big boost from the SECURE 2.0 Act

Small businesses — and the people they employ — have benefited from new retirement rules that could make it easier and more affordable for such companies to offer pension plans and ultimately help close the retirement savings gap at smaller companies.

About 5 million companies with nearly 57 million employees do not have workplace pension plans, according to AARP.

Read: What comes first? Emergency savings or your retirement goals?

As part of the federal spending bill signed into law in late December, a series of new retirement rules were introduced. Among the provisions, collectively known as Secure 2.0, is an extension of a tax break for companies with fewer than 50 employees to pay administrative costs when starting a new plan.

Previously, employers with fewer than 100 employees were eligible for a tax credit of up to 50% of plan administration costs, subject to an annual limit of $5,000. Secure 2.0 increases this credit to 100% of costs for employers with up to 50 employees. An additional credit of up to $1,000 per employee for eligible employer contributions can apply to employers with up to 50 employees, but that is phased out from 51 to 100 employees, according to Vanguard.

Read: Does emergency savings give you a stronger financial future? This Secure 2.0 provision builds on that

“We have a huge epidemic of people retiring from small businesses with just a pat on the back,” said Brandon Reese, president of TBS Retirement Planning. “These changes will help small businesses, employees who might not otherwise be able to save, and put less stress on Social Security. Small businesses make up half of the U.S. economy and this will create a positive ripple effect of retirement savings.”

Currently, nearly three out of four (74%) small businesses do not have a retirement plan for their employees, according to research published by ShareBuilder 401k.

Respondents to the ShareBuilder survey cited the top three reasons for not starting a plan: 58% believe their business is too small to qualify for a plan, 32% said they can’t afford one, and 24% believe 401(k) plans are too expensive to set up and manage.

Read: Inflation has some business owners rethinking their retirement savings

“Small businesses find it burdensome, expensive and risky to offer pension plans. But technology has changed, making it easier. The government takes care of the cost component. And some states are taking over and mandating that you have to make it available and that makes a difference too,” said Chad Parks, CEO and founder of Ubiquity Retirement and Savings. “So much has been done that it would be easy to offer pension plans. Why not do it?”

The Secure 2.0 provisions “could help change that and strengthen the small businesses that are the backbone of America,” Parks said.

There have been efforts at the state level to encourage small businesses to offer pension plans. More than 30 states have considered enacting pension plan legislation for businesses of all sizes. Of those states, 14 have signed programs that put pension plans into law.

The new Secure 2.0 rules now provide a federal incentive to encourage small businesses to offer retirement plans.

That will ultimately help small businesses become more competitive in attracting and retaining employees as they compete with larger companies with HR departments that hand out big benefits packages, experts said.

“Covering 100% of costs is really an incentive for small businesses to retain good talent,” said Nick Foulks, advisor and principal at Great Waters Financial.

There is a misconception that there is an employer obligation to make contributions to pension plans, Parks said. There is no such requirement.

Still, Secure 2.0’s provisions could burden small businesses if their plan costs exceed $5,000 a year or in the long term to carry the weight of the plans after the loan expires, Foulks said.

In total, 52% of employers offer their employees a 401(k) or similar employee-funded retirement plan. Employee-funded plans are more likely to be offered by large (90%) and medium-sized companies (83%), compared to small companies (44%), according to a report by the Transamerica Institute, a nonprofit private foundation that includes the 2021 Transamerica Center for Retirement Studies.

“People know they should be saving for retirement, but are they? People have inertia. It can be hard to save. It can be confusing. Maybe they don’t have an option at work. So hundreds of thousands of people are heading for the cliff,” Parks said.

Average working households have minimal retirement savings, according to the National Institute for Retirement Security. When all households, not just households with retirement accounts, are included, the median retirement account balance is $2,500 for all working-age households and $14,500 for pre-retirement households.

That could explain why about 40% of seniors rely solely on Social Security for retirement income, according to the National Pension Insurance Institute. Retired workers receive an average of $1,624 per month in social assistance as of July 2022.

“SECURE 2.0 is an absolute game changer for small businesses and what they can do and offer. It’s one of the biggest changes in 15, 20 years,” Reese said.

-Jessica Hall


(END) Dow Jones Newswires

01-14-23 1618 ET

Copyright (c) 2023 Dow Jones & Company, Inc.

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