MONEY 401(k)s

Working for a Small Business? Your 401(k) Is Probably Small, Too.

At Mom-and-Pop companies, workers may miss out on perks like employer matches. Here's what to do.

You might call it retirement inequality. Over the past couple of decades, 401(k)s have become our national retirement plan, but you are most likely to be offered one if you work for a large- and mid-sized company. Only 24% of small businesses offer a 401(k).

If you’re working at small business that provides a 401(k), congrats—you can make headway in retirement saving. Many small business 401(k)s are doing a decent job, a new Vanguard survey found. The survey covered 1,418 of the fund group’s small business 401(k)s, those with up to $20 million in assets. The average plan had 44 participants and held $2.4 million.

But your savings are likely to lag your counterparts at larger employers. Compared with overall 401(k) balances, small plan accounts are just half the size—an average $55,657 in 2013 vs. $101,650 for 401(k)s overall. Still, small balances rose 10% gain over $50,610 in 2012. Median balances, which better reflect the typical employee, averaged just $11,171, up just 2% from $10,950 in 2012.

One reason for the difference: Small businesses tend to offer lower salaries than large companies, and many have higher turnover, so workers have less time to save. Company matches may also be less generous. Three out of four small businesses offer an employer contribution, compared with 91% of 401(k)s overall, according to Vanguard. Some 44% provided a matching contribution, 10% offered both a match and non-matching contribution, and 21% gave out a non-matching contribution only.

In other ways, small business plans are keeping up with larger 401(k)s. Participation averaged 73%, similar to overall levels. The savings rates were lowest for employees younger than 25—only 46% contributed in 2013. And just 47% of those earning less than $30,000 saved in their plans. For those who did join, the typical savings rate was 7.1% of pay, nearly identical to the overall savings rate.

Mirroring larger plans, the most popular investment was a target-date fund, which gives you an all-in-one asset mix that shifts to become more conservative as you near retirement. Two-third of small business workers had all or part of their portfolio in a target date fund, while 46% held one as their only investment. Another 6% opted for a balanced fund or other model portfolio.

The one 401(k) feature not explored in Vanguard’s small business survey: costs. Of course, Vanguard is famous for its inexpensive fund and ETF offerings. But outside of Vanguard’s orbit, many 401(k)s are saddled with with high fees—and that’s especially true for small plans, which lack economies of scale.

If you’re investing in a small business 401(k) plan, save at least enough to get a full match, if one is offered. And choose low-cost, broad index funds, if they’re available. If your plan charges a lot—more than 1.25%—put any additional money in a Traditional or Roth IRA. Aim to save as much as 15% of pay, both inside and outside your plan. That way, your nest egg will grow bigger, even if the business remains small.

 

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