Big Ideas for Small Business Retirement Plans

I got Jeanette Howarth on the phone with Karen Friedman, director of the Conversation on Coverage, and Maria Freese, who headed the working group on small business coverage. Freese is also with the National Committee to Preserve Social Security and Medicare.

Howarth had a lot of questions. She probed for weaknesses or potential unfairness in the group's suggestions. But in the end, she came away liking its ideas.

What the Conversation on Coverage did was to try to improve the plan that many small businesses, including Howarth's, already use.

The plan is the Savings Incentive Match Plan for Employees of Small Employers, or SIMPLE. It allows owners of businesses with fewer than 100 workers to set up an individual retirement account for themselves and eligible employees. Workers can contribute up to $10,500 a year. Employers must offer matching contributions up to 3 percent of employee wages or fixed contributions equal to 2 percent of employee wages.

Howarth offers to match up to 3 percent of contributions dollar for dollar, although few of her workers have taken her up on it.

The law requires companies to put in the matching funds in good times and bad, which discourages many employers from offering the plan.

Conversation on Coverage suggests changing the rules to allow the ceiling on contributions to decline in years when the employer cannot afford matching contributions, and letting employees contribute even in years when the company can't afford to match contributions.

It also calls for financial institutions to assume most of the burden for educating employees about the savings plan. They also would administer the plan, relieving employers of many time-consuming tasks.

The proposal envisions creating pools of small businesses -- perhaps within a city or through an association -- whose plans could be administered together to reduce overhead costs.

The group recommends automatically enrolling workers in the retirement program. Howarth said she had been frustrated by the failure of some of her employees, especially younger ones, to understand why saving for retirement makes sense. Financial institutions could help educate those younger workers about the benefits of early savings, said Friedman and Freese.

The proposed plan would give financial institutions the option of allowing workers to take loans from their accounts -- a no-no with SIMPLE accounts, which are IRAs. That might make it more attractive to younger workers who worry that their savings are forever out of reach.

"I do like the features," said Howarth. "A lot of things have been worked out that have addressed some of the frustrations." Howarth said she thinks most small business owners want to do the right thing for their employees. "They do realize that if you treat people right, they'll be loyal, and they'll treat you right."

The retirement plan envisioned by the Conversation on Coverage isn't yet available -- it would require changes in the law. But if Howarth's reaction is any guide, it could help ensure that more workers go into retirement with something besides Social Security.

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