Advisors take note: It’s not a company’s size but rather the demographic makeup of its workforce that influences whether it sponsors a retirement plan.
In an updated study released this week, the Investment Company Institute found that companies with an older, higher-earning workforce are more likely to offer retirement plans than those with younger, lower-income employees.
Chip Roame, managing partner at Tiburon Strategic Advisors, says the findings ring true and are relevant to financial advisors looking for opportunities in the defined contribution plan market. “What this data says is that going after companies with younger and lower paid workforces may be worth little time but going after companies with older and higher paid workforces is the sweet spot,” Roame said in an e-mail statement.
The study found that younger and lower-income earners tend to save to fund educational pursuits, buy a home or make other purchases to meet more immediate needs -- but not to fund their retirement. Older, higher-earning workers, in contrast, are more likely to save primarily for retirement, more likely to prefer having their compensation in the form of retirement benefits rather than being paid fully in cash, and more likely to work for and seek out employers that offer retirement plans.
The study suggests that the reason why small firms are less likely than large firms to sponsor retirement plans is tied to employee workforce differences rather than the higher costs that small firms incur to implement and administer such plans. Employees at small firms tend to earn less and are less likely to work full-time for a full-year, factors associated with less ability and desire to set aside current income for retirement savings, said Peter Brady, ICI senior economist and co-author of the study.
The study found that small firms that offer plans tend to have workers who are similar to workers at large firms that offer plans. Conversely, large companies that lack retirement plans tend to share characteristics with employees at small companies that lack plans. “While costs may play a role, this study shows that differences in workforce composition appear to be a major cause for the low rate at which small employers sponsor retirement plans,” ICI said in the press release.