June 2, 1998

SMALL BIZ WORKERS WITHOUT PENSIONS: MAYBE THEY DON'T ASK

Be it lack of medical insurance, retirement benefits, or child care, a scarcity of fringe benefits can be one of the drawbacks of working for cash-strapped small companies. But are many employees of small companies not getting pensions simply because they aren't asking?

That's the suggestion of the Small Employer Retirement Survey, unveiled on June 1 by the nonprofit Employee Benefit Research Institute. The study confirmed what's already clear about the economics of running a small business: The smaller a company is, the less likely it is to offer retirement benefits. (About 3 in 10 employees in companies with fewer than 100 people are covered by pension plans, compared with 84% in companies with more than 1,000 employees.) The survey also found that small companies are reluctant to offer plans because of "uncertain revenue" and "administrative costs." They're also wary of government paperwork and legal requirements.

The study points out, however, that some of the ambivalence of small companies toward pensions is tied to their workers' own priorities. One-half of employers say they have held off on retirement benefits because workers put a higher priority on wages and other benefits, such as health insurance. Even among small companies with pension plans, just 25% list demand by workers as the motive for launching them. The apparent lack of employee interest is ominous to EBRI, which predicts that 25 million small-company employees face a potentially "bleak retirement" unless more of them join employer-sponsored retirement plans, such as the popular 401(k).

The primary reason employees don't demand such plans is that they aren't educated about their future, says EBRI Director Dallas L. Salisbury. "It's not the first priority of many employees," he adds, citing their stronger desire for company-sponsored health coverage, which nonetheless is provided by just 37% of companies with fewer than 100 workers. Yet half of the surveyed companies said they would seriously consider offering a retirement plan if employees began to ask for one.

Workers might be more insistent if they knew more about the Social Security System, whose long-term health may hinge on a major overhaul that may or may not materialize. Salisbury argues that small-company employees, and U.S. workers generally, have an inaccurate picture of how much Social Security will pay them. He contends that Social Security payouts are meager, especially for middle-class workers who want to maintain their standard of living throughout retirement. "There is not a full understanding among the American public of how small the benefit is going to be" Salisbury says. "There is a mythology that it allows people enough money to retire."

Using its study as a catalyst, the EBRI is planning an education campaign for both small-company employees and their bosses. It will have some huge allies, namely the banks and brokerage firms eager to tap into the small-business market with a myriad of products. All parties come armed with EBRI research that shows increased employee productivity and loyalty in small companies that do offer retirement benefits. Two-thirds of surveyed companies that offered a pension plan, for instance, reported a positive effect on attitude and performance. A majority of companies also claim that the plans give them an advantage when recruiting employees.

By Dennis Berman
Staff Reporter, Business Week Online