Introduced in 1978 by the passage of the Revenue Act by Congress, the 401(k) is now more than 40 years old, and the first people who have saved via a 401(k) for their entire career are hitting retirement. This dynamic shines a light on a significant gap in the American retirement savings ecosystem, namely that employees who work for small businesses have been largely excluded from what is now the country’s primary retirement savings vehicle.
The 401(k) was quickly adopted as a recruiting incentive by large companies competing for top talent, but they were prohibitively expensive to set up and administer for smaller companies. While more than 90 percent of employers with more than 500 employees offer a 401(k), nearly the opposite is true for employers with less than 100 employees. Only 12 percent of those companies offer their employees a 401(k) option.
Retirement savings gap
Human Interest studied how this disparity impacts a large section of the American workforce that is saving for retirement without the help of employee-sponsored plans. According to the study, more than 30 million small and medium-sized businesses (SMBs) employ around 60 million workers in the United states. That’s roughly half of all private sector workers.
The report also cites a relatively familiar statistic: More than three-quarters of Americans currently have insufficient personal savings to retire at age 67. The primary cause of this savings gap, the report says, is not a lack of desire to save, but rather a lack of financial tools to help people save, especially at work.
With retirement savings shortfalls becoming an increasing concern, legislators have attempted to address the issue with The SECURE Act, which simplifies the process and provides tax incentives for small businesses to establish 401(k) plans, as well as the emergence of state-sponsored plans, which give those who don’t have access to an employer-sponsored plan an opportunity to save in plan similar to a 401(k).
Not lack of demand but lack of 401(k) options
The Human Interest report emphasized that the lack of 401(k) options at small businesses is not due to a lack of demand amongst employees. When offered access to a workplace retirement plan, up to 85 percent of SMB employees participated and saved between 5 and 10 percent of their salary, the report found. Even without an employer match as an incentive, SMB employees saved about the same as those who did have an employer match.
The report found that younger SMB employees are saving at a similar rate to their older counterparts, although the oldest savers, those aged 50-64, still save the most as they near retirement.
The study also found similar savings rates among male and female SMB employees, although it noted women face not only a shortfall because of lower wages and a slightly lower retirement savings rate (7.9 percent vs. 7.5 percent), but they also have to stretch their retirement nest egg out over a statistically longer lifespan. That can translate into a difference of nearly $1,000 per month in terms of what women will accumulate vs. men on average.
In addition, married SMB employees overall save more than those who are single (8.2 percent vs. 7 percent), and those who are single contribute slightly more than those who are divorced (6.8 percent), the report found. Of note, married women saved at the highest rate of all groups at 9 percent, a dynamic that Human Interest suggested could help close deficits created by lower earnings and longer lifespans.
SMB industry sector saving
SMB employees working in the finance sector were the most likely of all industry sectors to participate in workplace retirement plans. However, the report also found strong participation among SMB employees working in the technology sector, who participate at nearly the same rate and are saving a larger portion of their salary in workplace plans, the report said. Participation among SMB employees in the nonprofit sector was also strong, although those employees saved the least at 6.1 percent.
Overall, 66 percent of workers in non-office verticals, including automotive and manufacturing, save for retirement through a company plan and contribute 8.2 percent of their salary on average. Just slightly more than half of service sector workers – those with jobs in retail, food service and hospitality – participate in workplace retirement savings plans and contribute about 7.7 percent of their earnings.
Finally, the report dispels a myth that only high wage earners save for retirement. Human Interest’s survey found that those earning between $30,000 and $39,999 per year save 6.1 percent of their salary, while those earning $200,000 to $209,999 save 7.7 percent in a 401(k). The report noted that consistent saving is the most important habit regardless of income level.
