Bridging the retirement savings gap for small business employees is a job still in progress

Insufficient retirement savings can lead to financial struggles, including over-reliance on Social Security, continued employment and potential dependence on family members. Lifestyle changes may be necessary, such as downsizing living arrangements and reducing quality of life, while health care options and long-term care could become limited. These individual challenges can also have broader economic impacts, increasing public assistance costs and reducing tax revenue, underscoring the importance of early and consistent retirement planning and saving.

The National Retirement Risk Index, maintained by the Center for Retirement Research at Boston College, has historically shown that about half of working-age households are at risk of being unable to maintain their pre-retirement standard of living in retirement. This translates to increased reliance on social safety net programs, putting pressure on federal and state budgets.

Additionally, reduced spending power among retirees dampens economic growth. Studies from the Employee Benefit Research Institute estimate that retirement insecurity could result in hundreds of billions in lost economic activity in the coming decades.

Recognizing the urgent need for action, 17 states have implemented or proposed state-facilitated retirement savings programs, according to the Georgetown University Center for Retirement Initiatives. These initiatives aim to overcome barriers facing small businesses while expanding retirement access for millions of workers.

California's CalSavers program was expanded in 2022 to require an estimated 400,000 businesses in the state with one to five employees to facilitate their participation in a retirement savings program. Oregon's OregonSaves has reported that more than 118,000 workers from over 21,000 businesses began saving for retirement. Illinois Secure Choice has seen similar success, with program administrators reporting 156,000 participants from 27,000 employers in all 102 counties participating.

These programs typically share several key features:

• Automatic enrollment. Employees are enrolled by default in Roth IRAs with payroll deductions (usually starting at 5% of wages) unless they explicitly opt out.
• Minimal employer responsibilities. Businesses simply facilitate payroll deductions without fiduciary obligations, plan administration or matching requirements.
• Portability. Accounts follow workers when they change jobs, addressing the mobility of the modern workforce.
• Professional investment management. Funds are professionally managed with age-appropriate default investment options.
• Scalable costs. By leveraging collective resources and economies of scale, these programs significantly reduce per-participant costs.

The Arkansas survey demonstrates strong support for such initiatives, with 79% of small business owners favoring a privately managed, ready-to-go retirement savings option. Moreover, 69% of Arkansas business owners who don't currently offer retirement plans indicated they would likely participate in a state-sponsored option if available, according to the AARP Research findings.

For Americans at or near retirement age with inadequate savings, several strategies can help improve their financial outlook:

• Consider guaranteed income annuities. Fixed annuities and fixed index annuities can convert a portion of retirement savings into guaranteed lifetime income streams, according to the Alliance for Lifetime Income. These insurance products can create pension-like monthly payments regardless of market conditions. Income annuities in particular can help address longevity risk by ensuring predictable payments that continue for life, with immediate annuities providing payments starting right away and deferred income annuities beginning at a future date, typically offering higher payout rates.
• Maximize catch-up contributions. For 2025, those 50 and older can contribute an additional $7,500 to 401(k) plans (for a total of $31,000). Individuals aged 60-63 can contribute up to $11,250 extra (for a total of $34,750). For IRAs, those 50 and older can contribute an extra $1,000 (for a total of $8,000), according to IRS guidelines.
• Delay Social Security claims. Each year benefits are delayed beyond full retirement age (up to age 70) increases monthly payments by approximately 8%, according to the Social Security Administration, providing significantly higher lifetime income for those who can wait.
• Consider encore careers. Part-time work during early retirement years can reduce the need to draw down savings while potentially providing access to workplace benefits.
• Explore home equity options. For the 78% of older Americans who own their homes, according to Census Bureau data, reverse mortgages, home equity lines of credit or downsizing may provide additional retirement resources.
• Review health care strategies. Understanding Medicare options, supplemental plans and long-term care insurance can help prevent health care costs from depleting retirement savings.

The retirement savings challenge facing small business employees is a complex issue with far-reaching implications for individuals, businesses and the broader economy. While the obstacles are significant, emerging solutions offer hope for improving retirement security:

• State-facilitated retirement programs are showing promise in expanding access to savings plans for small business workers.
• Innovative financial products, such as guaranteed income annuities, provide new options for creating stable retirement income.
• Individual strategies, including maximizing catch-up contributions and delaying Social Security claims, can help bridge savings gaps.

However, addressing this issue comprehensively will require coordinated efforts from policymakers, employers, financial institutions and individuals.