I have had the privilege of running multiple small businesses over the last three decades, some as an owner and others as senior manager. Among the considerable knowledge I have gleaned from those experiences is the troubling reality that there is a measurable gap in benefits between small businesses and their corporate and government competitors.
The benefits made available through government jobs are in an entirely different league compared with private-sector benefits. Often, even the best corporations cannot compete with the public sector. But corporations and other large companies still have a benefits advantage over small business because they have the economics of scale behind them.
Afraid to Grow the Business
I can tell you from personal experience that there is some fear among small business owners of actually growing their businesses to the point of needing to hire. The fear is pretty simple: once they start hiring, their costs go through the roof. They will spend so much on compensation and benefits that they will run their profits into the ground. It is a reasonable fear. It pops up all the time.
In my current business, I could easily bring on two or three employees and keep them busy by bidding on more work. But if I compensated them at the same level as a corporation with more financial resources, I would put myself out of business in short order.
This fear explains much of the data found in Fidelity’s 2023 Small Business Retirement Index report. According to Fidelity:
- 82% of small business owners say they cannot compete with larger companies on benefits
- 71% say they can’t afford to offer any kind of retirement plan
- 55% do not currently offer a retirement benefit and have no plans to do so
- 83% admit to not saving enough for their own retirement.
A small business in the United States employs 500 or fewer people. A micro-business employs 10 or fewer. I bring this up to mention one more statistic from the Fidelity report: 42% of micro-business owners worry about not being able to retire at all.
Employee Benefits Are Expensive
The simple fact of the matter is that employee benefits are expensive. We all know healthcare prices continue rising faster than the rate of inflation. That has been the case since the 1970s. But at least employers can find a silver lining in health insurance plans by convincing themselves that healthier employers are more productive. It’s hard to see any direct return on investment from a retirement plan.
If there’s any upside here, it’s the fact that carriers have recognized the difficulties small businesses face and are slowly developing more innovative products to meet their needs. BenefitMall, a brokerage general agency representing over a hundred carriers, cites the following examples:
- Self-employed 401(k)s
- Pooled employer plans (PEP)
- Simple and SEP IRAs.
BenefitMall encourages its brokers to leave no stone unturned in the search for affordable retirement plans. A broker capable of finding a plan well-suited to a struggling employer instantly becomes a hero in that employer’s eyes. Why? Because 63% of the employers surveyed by Fidelity say offering a retirement plan is the right thing to do. Give them something they can afford, and they will jump at it.
No Easy Answers
The benefits gap between small businesses and their larger competitors is very real. Small businesses are struggling to recruit, hire, and retain because they cannot compete with corporations and the public sector. Unfortunately, there are no simple answers to their dilemma. As long as the benefits gap continues, large and public sector employers will maintain their advantage.
