A Lifeline? Retirement Planning for Small Business Owners and Their Employees

February 24, 2017 • 12 min read
Ahmad El-Najjar

Ahmad El-Najjar


Americans are not good at saving and especially not good at saving for retirement. To be fair, retirement planning is difficult, and it can be particularly challenging for small businesses, whether it’s just you as a sole proprietor or you’re thinking about employees as well.

In fact, we’re so bad at saving for retirement that a 2016 Economic Policy Institute (EPI) study reported, “Nearly half of working-age families have nothing saved in retirement accounts.” What this means, the report estimates, is that “55 percent of households in which the head of the household is near retirement age (55-64 years old) will have to subsist almost entirely on Social Security income or will not be able to retire at all due to negligible savings.”

Unfortunately, small business owners are no exception.

The Small Business Administration (SBA) reports that among all small business owners “retirement account ownership, contribution, and participation rates for all business owners are low.” Ninety-one percent of the SBA’s sample of nearly 5,000 businesses had ten or fewer employees, and micro-business owners, sole-proprietors and home-based business owners were even less likely than other small business owners to own IRAs or participate in a 401k plan.

In its report, the SBA recommended developing “ways that help the owners of the smallest businesses, especially home-based sole proprietorships, increase their retirement savings,” and articulated a “need to better coordinate employer-based retirement accounts with individual-based accounts like IRAs, and make plans less complex and burdensome on business owners, especially for owners of micro-businesses.”

Help on the way


The federal government has been looking for ways to do just that for everyone who doesn’t have the option of an employer-sponsored retirement plan. Two United States Department of Labor (DOL) rulings in 2016 were designed to encourage innovation at the level of local government, specifically allowing states and larger cities to create a retirement savings plan for their residents. These new rules could change the way small business owners and their employees think about retirement.

In August the Department of Labor made a decision to allow state-sponsored retirement savings plans that small to large businesses could offer employees. A similar DOL ruling in December of last year allows city-sponsored plans for cities within a state that chooses not to create such a plan, so long as its population is greater than that of the least populous state, Wyoming (so, more than 600,000).

Such plans would not only help small business owners save for retirement, they would also allow small employers to help their employees save for retirement as well.

The easy availability of retirement savings plans is key in increasing the American retirement savings; our lack of savings isn’t just a matter of human nature. The EPI study’s authors argue that “the decline in employer sponsorship of retirement plans and the shift away from traditional pensions and toward 401(k)- type defined contribution plans are jeopardizing the retirement income security of U.S. residents.” In practice, this means that many fewer individuals have the opportunity to have automatic, pre-tax deductions taken from their paychecks, which dramatically increases savings over time.

To the dismay of the states and cities exploring these retirement savings options, recent legislation sponsored by Rep. Tim Walberg (R-Mich.), would invalidate the Department of Labor’s August rule allowing state plans. A similar piece of legislation sponsored by Rep. Francis Rooney (R-Fla) would invalidate the December Department of Labor rule allowing city plans.

Many local governments see Rep. Walberg’s and Rep. Rooney’s sponsored legislation, which would prevent local state- and city-sponsored retirement savings plans, as threatening their ability to provide an important service for their residents.

And it’s not just state and city governments who are upset.

AARP, the largest nonprofit representing retired Americans—over 38 million of them—offered a scathing rebuke to Walberg’s and Rooney’s sponsored legislation. AARP Executive Vice President Nancy LeaMond pointed out, “Today, 55 million working Americans do not have a way to save for retirement out of their regular paycheck. Those who do not save enough for retirement risk become dependent on social safety net programs, costing taxpayers down the line.”

LeaMond also noted that lack of access is even more prevalent in minority communities, where “only 54 percent of African American and Asian employees and 38 percent of Latino employees work for an employer that sponsors a retirement plan, compared to 62 percent of white employees.” Again, business owners fare no better, as minority small business owners are also less likely than white owners to have retirement savings plans.

The EPI’s report found that of the half of working-age families who do have some retirement savings, the lowest 50 percentile of working-age households had only about $5,000, while the the top 10 percent had $274,000. Meanwhile, the top 1 percent of Americans had, on average, $1,080,000 in retirement savings.

Looking at this stark inequality, 28 states including Oregon have passed or introduced legislation to provide retirement plans for private-sector workers.

Are you prepared for retirement? (Probably not.)

Many Americans have a poor sense of what they’ll need to retire and are relying on their social security contributions to cover the cost of retirement.

Retirement experts estimate that an individual will need anywhere from 70 to 85 percent of their pre-retirement income to sustain their working-years’ lifestyle. For the 2013 average American income of $50,000 a year, 80 percent would mean needing $40,000 a year in retirement. If we anticipate living 15 years after retiring, that means we’ll need $600,000 total to retire comfortably.

If you’re thinking social security benefits are going to cover enough of that, think again. Calculations available from the Social Security Administration show that someone earning $50,000 a year for 35 years (adjusted for inflation) would retire with a Social Security benefit of around $2,104 a month, or $25,248 a year—just over half of what experts suggest you’ll need. If you spend 15 years in retirement, that’s a total shortfall of $221,280.

Given that current retirement savings average $5,000, it’s clear that most Americans have no hope of retiring comfortably (or perhaps at all) unless they begin saving a lot more and as soon as possible.

While this is just an example, it’s an example that is being played out in the lives of tens of millions of Americans who are unprepared for retirement.

It’s something that many states, like Oregon, are trying to change.

What one state is doing for retirement: OregonSaves

On the heels of the 2016 Department of Labor rulings, Oregon announced its pilot launch of a state-sponsored retirement savings plan: OregonSaves.

The program was created in response to a very clear need of Oregon workers, more than half of whom have no retirement savings whatsoever. It was clear that, while many businesses would like to offer retirement savings plans like a 401K to their employees, many businesses, especially small businesses, were opting not to do so because of the higher cost of plans covering only a few employees.

In the words of the Oregon State Treasury—the state agency leading the program—“OregonSaves is for all workers who do not have a retirement savings option at work. It allows employees to save part of their paycheck in their own personally-managed accounts that go with them from one job to the next.”

The program also takes into account the potential burden on small business owners, as the employers “won’t need to offer a retirement plan of their own.​​”

The plan is currently scheduled for a phased rollout beginning July 2017 to businesses that have volunteered to participate in the program. Beginning 2018, Oregon will phase in the OregonSaves program for larger businesses with 100 or more employees, and then incrementally to medium- and small-sized employers, as well as freelancers.

OregonSaves leverages the collective financial power of hundreds of thousands of contributors from across the state. This allows the state to offer a plan that is competitive with comparable plans from large employers. OregonSaves also goes a step further, ensuring there is no direct financial cost to an employer whose employees choose to participate in the OregonSaves program. Contributing employees will be assessed a fee of one percent of their total contribution, to cover the cost of operating the program and managing the investments.

While employers will face no direct costs under OregonSaves, they will be required to make the payroll deductions necessary to remit their employees’ contributions to the OregonSaves program. The cost of implementing a payroll deduction will vary according to employer size and payroll service provider, but the true cost of doing nothing to shore up worker retirement savings is much higher.

An aging population with access to retirement savings is key to the growth and economic well-being of the state’s residents and local businesses—rather than retirement poverty putting more “pressure on already-strained tax-financed government programs,” as Oregon Treasurer Tobias Read noted. He added, “Market research predicts that by the fifteenth year, more than 500,000 Oregonians will collectively be saving billions.”

Treasurer Read finds Rep. Walberg’s and Rep. Rooney’s proposed legislation undermining programs like OregonSaves “puzzling,” as they would “undercut a strategy that will help create a new culture of saving.”

Read argues, “The retirement crisis will not solve itself. At a time when we ought to be encouraging more saving, it is disappointing that Congress may instead prioritize the failed status quo and undercut states’ abilities to forge solutions.”

What obligations do small business owners have under OregonSaves?

The state government is not alone in its support of the OregonSaves program. Many small- and medium-sized businesses across the state have already voluntarily opted into the pilot program, including Portland’s Annastasia Salon and Alma Chocolate.

Here’s what opting into the OregonSaves plan will mean for those businesses:

  • Every pay period, employers deduct a portion of participating employees’ pay and remit it to the plan.
  • The standard contribution rate for employees is five percent, but they can choose to save at other rates of one percent increments.
  • Starting at a future date, contributions will automatically increase one percent per year until they reach 10 percent, unless employees opt out of the increase.
  • Savings will be deposited into a Roth Individual Retirement Account in the employee’s name. These savings are after tax. In the future, however, employees will have the option of pre-tax savings through a traditional Individual Retirement Account.
  • Employees can save up to $5,500 per year if they are younger than 50 and $6,500 per year if they are 50 or older. Employers will not be responsible for monitoring if employees are nearing the contribution limit.​

The Oregon state government has made it clear that it will fight any congressional attempt to overturn the Department of Labor rules that allow for the OregonSaves program. Oregon Treasurer Read firmly stated his response, “I’m calling on Oregon’s congressional delegation to stand for the 1 million working Oregonians who don’t have access to retirement savings plans and to stand for small businesses—and to stand against this cynical resolution. I encourage every Oregonian to contact Congress and express similar alarm.”

The economic and social well-being of the 55 millions Americans who are unprepared for retirement, many of whom either own or work at a small business, is at stake. Nonetheless, Oregon—and the other 27 states looking to keep their retirees out of poverty—may be in for fight.

See what other states are working on or have enacted legislation like Oregon’s at Pension Rights Center’s tracker.


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