Small employers misjudge the cost and value of retirement plans, Boston College says

The retirement coverage gap among America's smallest employers is real. The reasons many owners give for it do not always hold up. A new issue brief from the Boston College Center for Retirement Research, reported by PLANADVISER, argues that small-business owners overestimate what a retirement plan costs and underestimate what it does for recruitment and retention.

Among U.S. employers with fewer than 50 workers, roughly half offer a plan. Among those with 500 or more, the share is 98%, according to the Department of Labor's 2024 National Compensation Survey. The small-business side dominates the employer universe. Bureau of Labor Statistics data show 97.5% of private-sector employers had fewer than 100 workers last year. Just 0.5% had 500 or more.

The CRR's 2023 Small Employer Retirement Survey rounds up the standard explanations: firm size and stability, perceived cost and complexity, employee preferences. The brief treats many of those as misperceptions rather than insurmountable economic realities. Newer businesses in particular run on narrow margins and volatile revenues. Owners treat a retirement plan as a fixed obligation that could bite in a weak quarter.

Those fears are measurable. More than half of small-firm respondents believed a plan would cost more than $10,000 a year. Nearly 30% thought it would cost double that. The brief points to 401(k) providers offering options with annual employer costs below $2,000.

The distance between those figures is where education comes in. The CRR proposes education from reputable service providers as one answer to the coverage gap, and the survey data explain why: owners are deciding on stale price assumptions. The brief is careful not to dismiss the cash-flow concern. It distinguishes between a business that cannot absorb the cost and one that misjudges it.

Size concerns are not evenly distributed. Among employers with four or fewer workers, 78% cited revenue and size as major reasons for not offering a plan. Among employers with 50 to 100 workers, that share was 38%. Yet the smallest firms are not the permanent holdouts that number suggests. Half of small businesses that offer a plan launched it within their first five years. By their tenth year, the figure reaches 87%.

The CRR reads that as formalization. A business that begins informally runs on whatever compensation works at the moment; as it grows, it adopts payroll systems, health insurance, and eventually a retirement plan. The owner who says 'we are too small' may be describing where the business is, not where it will stay.

The owner's list of reasons leaves out the hiring case. The CRR says small employers often fail to see retirement benefits as a tool for recruitment and retention. That omission matters to advisers, because the cost comparison covers only one side of the ledger. A plan that costs a few thousand dollars a year can affect whether a skilled hire stays.

The pattern tells advisers where the work is. A firm in its first five years is the hardest sell. By years five through ten, that same firm is likely to formalize benefits anyway. The adviser who lets the owner know early what a plan costs is the one in the room when the owner starts.

For plan advisers, the brief is evidence to bring into the room with a business owner. Start with the cost assumption. More than half of owners in the survey think a plan runs five figures. The provider market has options in the low thousands. Then make the retention argument. A plan is a recruiting tool, and a business owner who has not heard that argument is one a competitor may reach first.

The brief does not argue that every small employer should offer a plan. It argues that many who do not are deciding on wrong information. That is a narrower claim, and a more useful one: the correction is something advisers and providers can deliver.