Small businesses shun retirement plans over cost, complexity fears

Only about half of U.S. private-sector workers participate in an employer-sponsored retirement plan at any given time — a gap driven almost entirely by small employers, according to new research from the Center for Retirement Research at Boston College.

While more than 90% of larger employers offer retirement plans, just 49% of firms with fewer than 50 employees do so. Small businesses account for the vast majority of all U.S. firms and employ roughly one-third of private-sector workers.

The result is that roughly one-third of households end up completely reliant on Social Security at retirement, while others move in and out of coverage throughout their careers, accumulating only modest 401(k) balances.

Small employers consistently cite three barriers to offering retirement plans: concerns about firm size and financial stability; perceived costs and administrative complexity; and employee preferences for wages over benefits.

But many of these fears are based on misperceptions, the Boston College brief explained.

Researchers said that several 401(k) providers offer options with annual employer costs of less than $2,000 for a firm with five employees and less than $3,000 for a firm with 25 employees. Yet more than half of small firms believe offering a retirement plan would cost more than $10,000 per year and nearly 30% think it would cost more than $20,000 annually.

“Interestingly, many of these firms do not have a good idea of how much expense or time is actually involved in providing a plan,” the brief stated.

The vast majority of small employers — particularly those with fewer than 50 workers — are unaware they can claim a tax credit of up to $5,000 per year for three years to offset the costs of starting a plan. About 80% of employers say such a credit would make offering a plan more attractive, according to researchers.

Why some small firms offer plans

Despite the barriers, about half of small employers do sponsor retirement plans.

These firms tend to be larger, more financially stable and more mature — with 87% of businesses that offer a plan doing so by their 10th year in operation, compared with just half in their first five years, the brief said.

Salary levels are among the most predictive indicators of plan sponsorship.

Firms where the average employee makes more than $30,000 are much more likely to offer a plan. Professional, technical and scientific services firms are more likely to offer plans, while those in retail, hospitality and food services are significantly less likely.

Perhaps most significantly, employer beliefs about recruitment and retention matter independently of firm characteristics.

Firms that view retirement benefits as tools for attracting and retaining workers are 31% more likely to offer a plan.

State programs gain traction

In the absence of federal action, states have seized the initiative.

Oregon launched the first mandatory auto-IRA program in 2017, followed by California in 2018 and Illinois in 2019. As of mid-2026, 15 states have mandatory auto-IRA programs operating — with more than $3 billion accumulated across more than 1.3 million funded accounts.

The 2023 Small Business Retirement Survey found that state-sponsored programs complement rather than substitute for private plans. Among firms already offering plans, about 70% say they would continue to do so even if their state imposed a mandate.

Among firms without plans, almost 60% said a mandate would actually make offering their own retirement plan more attractive.

Federal efforts, fintech innovation

The SECURE 1.0 Act in 2019 created Pooled Employer Plans — allowing multiple unrelated employers to join a single retirement plan to reduce costs and administrative burdens.

SECURE 2.0, passed in 2022, expanded tax credits and introduced the “starter 401(k)” plan, the brief cited.

But uptake has been slow, occurring mainly among mid-sized employers that already have plans. Research from Cerulli suggests growth is in takeover plans in the $1 million to $25 million asset range, rather than employers offering a retirement plan for the first time.

Technology-driven providers are also reshaping the market through automation, simplified plan design and lower-cost administration.

Several fintech firms now offer digital retirement platforms that can establish a plan online within days and handle enrollment, payroll deductions and compliance automatically.

Still, fintech solutions are unlikely to close the coverage gap on their own, as they often require employers to have automated payroll systems, and many small employers remain unaware of available options, researchers added.

“Employers need clear information, trusted guidance and simple pathways to adoption,” the brief concluded.

This article was written by Jonathan Delozier and generated with the assistance of HousingWire Automation. It was reviewed by a HousingWire editor before publication.