The Real Reason Small Business 401(k)s Matter
There’s a ton being written about new 401(k)s for small business. I know, because I co-founded one of the companies that’s focusing on this problem. But, aside from how amazing these new 401(k)s are, I think it’s equally important to understand why they matter (and they do matter):
America’s retirement scorecard:
- At last count, about 77 million Americans don’t have an employer sponsored retirement plan.
- 5 out of 6 small businesses don’t offer a retirement plan, which means 1 out of 2 Americans do not have access to a retirement plan at work.
- Of those who do have access, they save very little — $12,000 is the median retirement savings amount for a near-retiree household.
- And, what they do save is slapped with high fees — wasting $15 billion in unnecessary fees, each year. (Directly eroding savings potential.)
- The result: a whopping $6.8 trillion dollar retirement savings deficit in this country.
Not very impressive. However you read this, our retirement system, such as it is, seems to be broken. And, at first glance, small businesses seem to be the slackers.
Small businesses are not slackers…
Get ready, we’re sneaking up on the “why it matters” part. The report card points a finger at small business, that’s true, but here’s the thing: It’s not about small businesses underperforming, it’s about small businesses not having the tools to compete in the first place. The typical, old-school 401(k) requires care and feeding, dedicated staff, and big budgets to prop it up and pamper it. Small businesses don’t have this option.
The inefficient beast that is the typical 401(k) has never been optimized for small businesses, so it’s a wonder that small businesses try to use them at all!
… but they don’t have much to work with
Compared to larger businesses, small businesses can easily become crippled by a 401(k)’s administrative and fiduciary requirements. And, because the economics are not there, typical 401(k)s, when sold to small businesses, tend to come with unacceptable costs for small employers and their employees. It’s just not a profitable enough proposition for the folks who sell 401(k)s. So generally, when these sellers do provide 401(k)s to small businesses, those plans come with:
- Prices that have been dialed up (to make it worth their while)
- Service levels that have been dialed down, often drastically (to make it worth their while)
That leaves a small business damned if it does, and damned if it doesn’t. The result: that scorecard, above.
In fact, the current 401(k)’s archaic complexity is responsible for much of what’s broken about our retirement system today, and is a direct contributor to the $6.8 trillion retirement shortfall facing America.
So, what’s really going on?
Well, business as usual, I’m guessing. The small business market is fragmented and very difficult to penetrate at scale. Sort of like the Wild West in the early days of this country. At last count, there were roughly 723,000 small business 401(k) plans, served by some 307,000 advisors (The Cerulli Report, Retirement Markets 2013). Lacking any kind of economy of scale, this Wild West scenario languishes in a state of inefficient despair. That, plus the havoc this situation has been wreaking (see scorecard), adds up to a dangerous inertia.
It’s time to fix this
Let’s face it, the 401(k) as we’ve known and loved it up until now, is just not a consumer item. Not many people talk with friends about how excellent their 401(k) is:
Nope. For most people, including employers, it’s a complex, dark-side-of-the-force, bad-vibe conundrum:
Enter financial technology. Enter socially-minded business ventures. This can be fixed. I can tell you, it’s an exciting time for anyone who wants to do stuff that really, really matters.
This really, really matters
We believe that to improve that appalling retirement scorecard, and radically increase the number of company-sponsored 401(k)s, viable small business solutions for retirement saving must not only be added to the game, they must be consumer-friendly. And, for small business employers to easily and widely adopt the 401(k) – it must conform to their reality – actually empowering them to achieve more with less. At ForUsAll, we also believe it must be automatic and inexpensive both for a small employer to sponsor, and for employees to use.
And that is not the case yet, in any meaningful way. And that is why developing a 401(k) that’s relevant to small businesses really matters.
Whether you’re a small business owner or an employee, let me know what you think about all this!
