Layla Zulfa
A significant chasm exists in retirement savings across the U.S. private sector, with only approximately half of all workers participating in an employer-sponsored retirement plan at any given time. This disparity, according to groundbreaking research from the Center for Retirement Research at Boston College, is overwhelmingly driven by the reluctance or inability of small employers to offer such benefits. While over 90% of larger companies provide retirement plans to their employees, a starkly lower 49% of businesses with fewer than 50 employees do the same. This disparity is particularly concerning given that small businesses constitute the vast majority of all U.S. firms and collectively employ roughly one-third of the nation’s private-sector workforce. The consequence is a substantial portion of American households facing retirement with an over-reliance on Social Security alone, or accumulating only modest savings through sporadic participation in plans like 401(k)s throughout their careers.
Understanding the Obstacles: Small Employers’ Perceived Barriers
The Center for Retirement Research’s comprehensive brief delves into the persistent reasons cited by small employers for their abstention from offering retirement plans. Three primary barriers consistently emerge: concerns about firm size and financial stability, the perceived costs and administrative complexity associated with managing a plan, and a belief that employees prioritize immediate wages over long-term benefits. However, the research strongly suggests that many of these deeply held fears are rooted in misperceptions rather than current realities.
A critical finding of the study highlights the significant disconnect between perceived and actual costs. While many small business owners believe offering a retirement plan would incur substantial annual expenses, the reality is far more manageable. For instance, the research indicates that several 401(k) providers offer plans with annual employer costs of less than $2,000 for a firm with just five employees. Even for a slightly larger small business with 25 employees, the estimated annual cost remains below $3,000. Despite this evidence, over half of these small firms erroneously estimate that offering a retirement plan would cost more than $10,000 per year, with nearly 30% anticipating annual expenses exceeding $20,000. This suggests a significant knowledge gap, as the brief notes, "Interestingly, many of these firms do not have a good idea of how much expense or time is actually involved in providing a plan."
Furthermore, a substantial majority of small employers, particularly those with fewer than 50 workers, remain unaware of valuable financial incentives designed to mitigate the cost of establishing retirement plans. This includes a federal tax credit of up to $5,000 per year for three years, specifically intended to offset the initial expenses of setting up a plan. The research underscores the potential impact of this incentive, revealing that approximately 80% of employers surveyed indicated that such a credit would significantly increase their willingness to offer a retirement plan. This points to a critical need for enhanced outreach and education to ensure small businesses are aware of and can leverage these available resources.
The Profile of Small Businesses That Do Offer Plans
Despite the prevalent challenges, a notable segment of small employers—approximately half—do successfully sponsor retirement plans. An analysis of these businesses reveals common characteristics that may contribute to their ability to provide this valuable benefit. These firms tend to be larger within the small business category, possess greater financial stability, and are more established in their operational tenure. The research indicates that 87% of businesses offering a retirement plan have been in operation for at least 10 years, a significant contrast to the roughly 50% of businesses in their first five years that offer such plans. This suggests that a period of sustained growth and financial grounding is often a prerequisite for small businesses to confidently invest in employee retirement benefits.
Salary levels also emerge as a strong predictor of retirement plan sponsorship. Firms where the average employee earns more than $30,000 annually are considerably more likely to offer a retirement plan. Industry sector also plays a role, with professional, technical, and scientific services firms exhibiting a higher propensity to offer these benefits compared to those in retail, hospitality, and food services, which are significantly less likely to do so. These sector-specific trends may reflect differences in workforce demographics, profit margins, and the competitive landscape for talent.
Perhaps one of the most impactful findings relates to the underlying beliefs of employers regarding the strategic value of retirement benefits. Firms that perceive retirement benefits as crucial tools for attracting and retaining talent are a remarkable 31% more likely to offer a plan, irrespective of other firm characteristics. This highlights the importance of a forward-thinking management perspective that views employee benefits not merely as an expense, but as a strategic investment in human capital and long-term business success. This mindset shift is crucial for encouraging more small businesses to overcome their hesitations and embrace the offering of retirement plans.
State-Level Initiatives: A Growing Trend in Retirement Access
In the absence of comprehensive federal mandates or widespread private sector initiatives, a growing number of states have taken the lead in addressing the retirement savings gap. These states have implemented innovative programs, primarily focusing on auto-Individual Retirement Arrangement (IRA) plans, which automatically enroll employees unless they opt out. Oregon pioneered this movement, launching its mandatory auto-IRA program in 2017. This was followed by California in 2018 and Illinois in 2019, marking a significant wave of state-led action. As of mid-2026, a total of 15 states now operate mandatory auto-IRA programs, collectively amassing over $3 billion across more than 1.3 million funded accounts.
The impact of these state-sponsored programs extends beyond simply increasing participation. The 2023 Small Business Retirement Survey indicates that these initiatives tend to complement, rather than replace, existing private retirement plans. Among businesses that already offer a plan, approximately 70% reported that they would continue to do so even if their state were to implement a mandatory program. More strikingly, among firms that do not currently offer a plan, nearly 60% stated that a state mandate would actually make offering their own private retirement plan more attractive. This suggests that state programs can serve as a catalyst, raising awareness and demonstrating the feasibility and desirability of retirement savings solutions, thereby encouraging businesses to explore their own plan options.
Federal Efforts and the Rise of FinTech Innovation
The federal government has also made attempts to address the retirement savings gap, particularly through legislative measures aimed at simplifying and reducing the cost of retirement plans. The SECURE 1.0 Act, enacted in 2019, introduced Pooled Employer Plans (PEPs). PEPs allow multiple unrelated employers to join a single retirement plan, thereby pooling resources and administrative responsibilities to lower costs and reduce the administrative burden for individual employers. This innovation was designed to make it more feasible for smaller businesses to offer plans by sharing the administrative overhead with other participating companies.
More recently, the SECURE 2.0 Act, passed in 2022, built upon these efforts by expanding existing tax credits and introducing the "starter 401(k)" plan. The starter 401(k) is designed to be a simplified, low-cost option for employers, particularly those who have not previously offered a retirement plan. However, the uptake of these federal initiatives has been described as slow, with growth primarily observed among mid-sized employers who already possess some form of retirement plan. Research from Cerulli indicates that much of the current growth in PEPs is driven by "takeover plans," where existing plans are consolidated into a larger PEP, rather than by new employers initiating retirement plan offerings for the first time.
Parallel to legislative efforts, technology-driven providers, commonly known as FinTech firms, are significantly reshaping the retirement plan landscape. These companies are leveraging automation, simplified plan designs, and lower-cost administration to make retirement savings more accessible. Numerous FinTech platforms now offer digital solutions that can establish a retirement plan online within a matter of days. These platforms often automate critical processes such as enrollment, payroll deductions, and compliance, thereby reducing the administrative burden on employers. However, even with these technological advancements, FinTech solutions are unlikely to fully close the coverage gap on their own. Many of these digital platforms require employers to have automated payroll systems in place, a feature not universally present in all small businesses. Moreover, a significant portion of small employers remain unaware of the existence and availability of these innovative FinTech options.
The overarching conclusion from the research is clear: employers require more than just technological solutions. "Employers need clear information, trusted guidance, and simple pathways to adoption," the brief concludes. This emphasizes the ongoing need for education, accessible resources, and a supportive ecosystem that demystifies the process of offering retirement plans and empowers small business owners to make informed decisions that benefit both their employees and their businesses. The persistent gap in retirement coverage among small businesses remains a critical challenge to broad-based retirement security, demanding continued attention and multifaceted solutions from policymakers, financial service providers, and employers themselves.
