Top Challenges for Small Business Owners

By ShareBuilder 401k

Research Shows Small Business Owners’ Confidence to Retire Has Fallen as Misperceptions and Lack of Awareness Remain Major Roadblocks to Saving and Starting a 401(k)

As part of our ongoing quest to help more Americans save, ShareBuilder 401k fielded a survey in March and April to better understand what is motivating (and more importantly, what is preventing) small business owners from taking the necessary steps to plan and secure their financial futures, and help their employees do the same. Little did we know how far-reaching the Coronavirus pandemic would be; it will be a long time before we have a full grasp on that. Nonetheless, the research offered a glimpse into the mindsets and challenges of today’s small business owners, and their plans and priorities for the future, amidst turbulent markets and uncertain times. Here’s what we learned.

Small Business Owners Are Struggling to Save as Confidence About the Future Declines
Beyond concerns related to the economy and volatile markets, small business owners are increasingly worried about their ability to retire, with 44 percent overall saying they aren’t confident they are saving enough – a steady increase since 2017 (at 38 percent) and 2013 (at 35 percent). Female-led and owner-only businesses are the most worried, with 54 percent of women small business owners saying they’re not confident about their ability to retire, compared to 36 percent of males, and with an alarming 59 percent of one-person businesses overall reporting they aren’t confident they’re saving enough. Nearly two in five small business owners overall (39 percent) and three in five owner-only small businesses (57 percent) say it’s unlikely they will ever retire.

When it comes to saving, there is some good news. According to the survey, more than a third (36 percent) of small business owners overall are putting away the recommended 10 percent or more (an increase from 28 percent in 2017) and fewer owners are putting away nothing (22 percent, compared to 25 percent three years ago). The red flag here is the dramatic difference in savings rates based on business size. Only 27 percent of one-person business owners are putting away 10 percent or more compared to 52 percent of those with 10-50 employees. Meanwhile, a high percentage (73 percent) of small business owners plan to depend on Social Security.

Unfortunately, the percentage of small businesses that offer retirement plans or a 401(k) has lagged, despite the many benefits and advantages of having one. Just 28 percent of businesses in the 2020 survey indicate they offer a 401(k) plan, and the smaller the business, the less likely it is to offer any type of plan. Only five percent of owner-only businesses have a 401(k), and only 19 percent of businesses with 2-9 employees.

72% of Small Business Do Not Offer 401k Benefits
Of course, those that offer 401(k) plans are benefitting -- with ability to attract better employees (52%) cited as the top benefit of having a plan, followed by feeling more confident about their retirement plan (46%), and employee retention (42%) rounding out the top three. Those with 401(k)s can also benefit from added protection of these monies from creditor and ability to access penalty-free if an emergency arises. (link)

Myths and Misperceptions Persist as Roadblocks to Offering 401(k) Plans
There are a number of myths and misperceptions that continue to prevent many business owners from reaping the benefits of a 401(k) plan, reinforcing the need for better education, awareness and quality, unbiased support. Here are the most popular myths and blockers revealed through our research, along with their associated truths.

401(k) Myths and Blockers The Facts
My business is too small to access a plan 64% of small business owners that don’t offer a plan indicate this is the reason Any size business can have a plan, even the self-employed. Yes, you can have one!
Can’t afford to offer a company match 18% indicate this is stopping them from offering a 40((k) plan Matching isn’t required to offer a 401(k) and if your company decides to provide a match, it’s tax deductible. Nice!
It’s too expensive to set up and manage 14% believe it’s too expensive There are low-cost providers that focus on helping small businesses. Plans can start at <$100 a month, core costs are tax deductible, and tax credits are substantial for businesses with 1 to 100 employees starting their first plan. Yeah!
Employees are not interested in having one 12% feel their employees won’t want it About 85% of employees will participate in a 401(k) plan. You can help a lot of your team save.
I don’t want to take on the risks and responsibilities of managing one 12% indicate this as a blocker Many plans can be managed with just a little effort each payroll and risks can be reduced by selecting a provider that selects and manages the investment roster for your plan.

Many small business owners also have major misconceptions about 401(k) investment expenses and what is a fair cost. According to our research, small business owners on average think it’s fair to pay 6 percent in investment expenses. More than a third (36 percent) overestimate the cost of fund expenses and other investment costs, saying that it’s fair to pay 5 percent or more, and 41 percent don’t know how much is fair to pay in those fees.

At ShareBuilder 401k, we advocate to keep costs well under 1% which is more than doable and allows for participants to keep more money invested in the markets. If you have fund expenses that are higher than 1%, that’s a red flag to go find lower cost fund options. Index funds often have low-expenses and can be a good fit for long-term saving. Even paying 1% more in investment expenses can cost an employee hundreds of thousands of dollars in retirement savings.

Paying 1% Less Can Make a Big Difference in Your Savings
This example shows the effect that expenses can have on your 401(k) retirement account over a career of 40 years by comparing the costs of paying 1% versus 2% on investments and how savings may accumulate. It assumes the investments have a fixed annual 7% return before expenses with no distribution or tax considerations and does not imply future returns. The example assumes each employee has a salary of $75,000 in year one and receives a 3% merit raise each year on-going. In addition, the employee contributes 5% of her salary each year and receives a 3% of salary company matching contribution.

A Vast Majority of Small Business Owners Are Unaware of New Tax Credits and Benefits that Make 401(k)s More Affordable and Accessible
The SECURE Act signed in the first part of 2020 offers compelling and substantially increased tax credits for businesses with 1-100 employees. According to the SECURE Act small businesses starting their first 401(k) plan can receive up to $15,000 in tax credits. These credits are applied over the first three years of the plan to help offset 50% of costs such as plan setup and administration.

These are substantial changes that could benefit many small businesses and their employees. However, only three percent know something about the Secure Act, eight percent know very little, and 88 percent don’t know anything about it. If made aware, 43 percent indicate would be likely to start a plan – indicating a critical need to drive further awareness of new programs and benefits.

As small business owners continue to navigate these unprecedented times, many are understandably putting long-term savings and retirement on the back burner. It’s important we remember that as each year passes, retirement closes in, and even if retiring isn’t your goal, building a solid nest egg needs to be, so you are better able to manage through any health situation, finance an exciting opportunity, or navigate a financial shock that may arise. At ShareBuilder 401k, it’s our mission to lead more Americans to save, particularly through these uncertain times.

METHODOLOGICAL NOTES. The ShareBuilder 401k Retirement Survey was conducted by Wakefield Research (www.wakefieldresearch.com) among 500 U.S. Small Business Owners at companies of 1-50 employees, between March 27th and April 3rd, 2020, using an email invitation and an online survey. ShareBuilder 401k has fielded regular research on the small business marketplace since 2006.
Results of any sample are subject to sampling variation. The magnitude of the variation is measurable and is affected by the number of interviews and the level of the percentages expressing the results. For the interviews conducted in this particular study, the chances are 95 in 100 that a survey result does not vary, plus or minus, by more than 4.4 percentage points from the result that would be obtained if interviews had been conducted with all persons in the universe represented by the sample.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.