Small-business owners aren't waiting for more evidence of the 'brain drain' as more than 19 million American workers reach traditional retirement age of 65 in the next three years.

Twenty-eight percent of the small-business owners in a recent survey have planned for knowledge transfer from these experienced older workers to other workers.

The National Association of Professional Employer Organizations, NAPEO, sought to examine the plans of owners of small businesses nationwide that are served by professional employer organizations, or PEOs.

Conducted February 12-26, 2008, the survey of 404 owners of small businesses reveals their plans for dealing with the aging workforce. The trade group, whose members manage human resources responsibilities for small businesses, believes these firms are more attuned than some larger ones to the demographic impacts on their competitive advantage.

"For a small business, losing even one seasoned knowledge worker affects them competitively," says Milan P. Yager, NAPEO's executive vice president. "These business owners want to ensure that seasoned workers convey their knowledge, or even continue working longer if possible."

The owners also know their own value and will not let themselves get caught short when it's time for them to leave, Yager noted. Looking to their own retirement, 35 percent of the surveyed business owners say their own retirement plan is solid, and another 10 percent will have a plan in place by year-end. Half report their retirement savings goal is at least $1 million, and seven in 10 have set a savings plan to reach their goal.

The small businesses are outpacing larger firms in their planning. Only one quarter of large organizations are making any effort to transfer knowledge from soon-to-retire baby boomers (those born between 1946 and 1964) to other workers, according to a 2007 report by Novations Group, a global consulting and training firm. Just 4 percent have created a formal process to pass on know-how. Also, Monster reported that knowledge retention is not a high priority among organizations in its September 2007 survey report.

Businesses in NAPEO's survey have more older workers this year than last. This year 21 percent said at least 5 percent of their workers are ages 60 to 64; last year, fewer (16%) of the respondents reported workers in that age group. And more businesses this year said older workers are delaying retirement; 37 percent, versus 18 percent in 2007. Only 4 percent said that some workers would retire before age 65.

"These entrepreneurial small businesses are ready for the baby boomers' choices," Yager said. "Our survey shows their great acumen and flexibility in the midst of major workforce changes."

Apparently they've heeded the signals from groups such as The Conference Board. "Organizations that fail to understand the complexities or recognize the opportunities associated with an aging workforce may risk their ability to stay competitive," said Jeri Sedlar, senior advisor to The Conference Board on mature workforce issues. "As more companies feel the pain of knowledge losses caused by retirements in key businesses or functions, those not planning ahead or leveraging their mature workforce will be scrambling."

Even as they plan for workers to retire, the business owners in NAPEO's survey are facing the fact that some of their older workers want to delay retirement past age 65. Nearly two-fifths (38%) of those surveyed said their workers ages 60-64 are waiting until later to retire; and their leading reason is they enjoy working, even though they could afford to retire.

"The good news is that many baby boomers are willing and able to continue working and do not see age 65 as an automatic signal to stop working completely," said Sandra Dickerson, co-CEO of Your People Professionals.

"We find employees remaining active, vibrant and energetic for a longer time frame. They want to be genuinely engaged. Forward-thinking companies are capitalizing on this valuable resource by investing time and effort in organization development plans and strategies that formally and appropriately position older workers in the company," said Ron Stoll, executive vice president of Innovation Hr, Inc.

"Today's career-minded person continues the educational and intellectual development process well beyond the classical completion of high school or college. This phenomenon keeps people in a contributory mode rather than the coasting mode we often saw in the past," he said. "The senior people in an organization bring a unique perspective of history and insight to the organization."

Will these older workers be ready financially when they decide to retire? The AARP's Public Policy Institute isn't so certain. Its January 2008 report states: "At least half of baby boomers are on track to a comfortable retirement. However, substantial numbers of them are not. Many boomers—even those on the verge of retiring - are clueless about how much income they'll need."

That suggests an opportunity for professional employer organizations and other human resources organizations to provide retirement planning services for older workers—including financial planning and guidance on more flexible work arrangements, including phased retirement.

"Businesses and workers have more options now than ever to phase in retirement so that these valuable older workers can continue to contribute their knowledge and skills," said Jay Keegan, president and CEO of Adams Keegan, Inc. "Human resources professionals can provide guidance for both the business owner and workers about their choices so that the retirement transition is smooth for all concerned."

Policy makers have focused on the new workforce of baby boomers who are not certain they want to stop working. The Pension Protection Act of 2006 allows pension plans to make distributions to workers over age 62 who have not yet ended their employment. This could allow older workers to phase-in their retirement by working part-time while receiving pension benefits to make up the difference in wages.

The NAPEO study indicates that small businesses—the backbone of America's economy, with more than 58 million workers—are ready and eager for HR experts' advice.

Small Businesses Have More Older Workers, and Some Want to Stay On

The small business owners in the NAPEO survey this year report a greater percentage of their workers are ages 60-64 than in last year's survey. One-fifth of these businesses said workers in that age group are at least 5 percent of their workforce; last year, fewer (16%) of the respondents reported workers in that age group.

One out of 10 surveyed said these older workers make up 10 percent or more of their workforce. Given that the majority (75%) of the businesses in this year's survey have 50 or fewer workers, there's reason to believe the impending departure of 10 percent of their seasoned workers could greatly affect the companies' success.

It's entirely possible they will start leaving if they have not already done so, according to a MetLife Mature Institute survey. That study of baby boomers turning 62 this year found the majority are already retired or will be fully retired by age 65. Most (77%) consider themselves in good to excellent health.

In the NAPEO survey, however, just 4 percent of the business owners said any of their workers will retire before age 65 in the next year—compared with 8 percent who predicted this in the 2007 NAPEO survey.

So why would they want to continue working? About 37 percent of the businesses in NAPEO's survey said some of their older workers (ages 60-64) are delaying retirement. The number one reason is they enjoy working; the other reasons are largely financial, such as wanting to take advantage of Social Security's delayed retirement credit.

"Their reasons for wanting to continue participating in the workforce are often financial, but many also just are too healthy and active to see themselves as retired in the traditional sense," said Sandra Dickerson, co-CEO of Your People Professionals. "Businesses need to find creative ways to utilize older workers, because the employers that plan for this drastic shift in the workforce demographics will have a strategic advantage over competitors caught unaware and unprepared."

More than a quarter (28%) of the business owners in the NAPEO survey recognize the importance of having in place a plan to retain institutional knowledge—and 17 percent say it's a "fully established plan," while another 11 percent are currently developing one. That actually sets them apart from many large companies with human resource staffs to help develop such plans.

When Monster, the giant job board company, conducted a survey of human resource managers, these professionals reported only 12 percent of their organizations have a formal method to identify the knowledge that needs to be protected and retained. And those are companies large enough to have HR managers on board.

Only one quarter of large organizations are making any effort to transfer knowledge from baby boomers to other workers, according to a 2007 report by Novations Group. Just 4 percent have created a formal process to pass on know-how.

Where does that leave small companies? "Many small businesses don't think they're big enough to start a knowledge management program, but they're more vulnerable because their knowledge is concentrated in some very key people," said Paul Jamieson, vice president of Monster Intelligence, during a September 25, 2007, webinar on the survey results.

So it's encouraging that the business owners in NAPEO's survey appear to be thinking ahead - more so than even the large companies with HR staff. Yet there's some evidence that the other 65 percent may not yet have awoken to the issue of transferring knowledge from their older workers before they retire; they said, "This is not yet an issue for our company." And, 7 percent said they have "no interest in developing a plan for this."

The opportunity for professional employer organizations and human resources professionals could not be clearer. Don't wait until the baby boomers leave to offset the potential "brain drain."

The broader issue is to ensure knowledge transfer whenever any worker leaves, no matter the age. Organizations need to focus on conventional turnover, too - not just retirement, according to the Monster survey report.

"Owners of small businesses must pay attention to retention; they just cannot afford to lose a productive worker with unique skills and knowledge," said Jay Keegan of Adams Keegan. "At the same time, they have to focus on operations and profitability, so they seem to welcome professional human resources services to make sure managers' and workers' needs are addressed. That will reduce the potential for costly turnover."

The age demographics will drive planning for knowledge transfer, no doubt. "Business owners need to plan how to preserve intellectual capital for their companies," said Aaron Witsoe, president of Creative Business Resources. "They can set up mentoring programs and hold regular forums for sharing knowledge. They will need to document the information and involve every worker, not just the most senior, in the process."

Are business owners prepared for their own retirements? In fact, 68 percent have set up a plan or are starting to create one, and seven in 10 already have a savings plan to reach their goal, the NAPEO survey shows.

More than a third (35%) said their own retirement plan is solid, and another 10 percent will have a plan in place by year-end. Just over half (51%) report their retirement savings goal is at least $1 million.

While NAPEO did not ask for their ages, the association's survey did ask about the size of the business owners' nest egg so far. About two-thirds (65%) said it's less than $250,000; 19 percent, between $250,000 and $500,000; 10 percent, $500,000 to $1 million. Six percent had reached the $1 million or more mark.

"It's great to see that about 23 percent of the business owners are targeting a balance of more than $2 million in their personal 401(k) accounts at retirement, because I believe that most workers and owners are not saving adequate funds for retirement," said Scott Buchanan, president and CEO of Human Resources, Inc.

Two-thirds (67%) of the businesses in NAPEO's survey have a 401(k)—or 403(b)—retirement plan for their workers, according to the NAPEO survey this year. And they are not just offering the plans; they are contributing.

Three-quarters of the businesses in NAPEO's survey contribute to a 401(k) plan- a substantial increase from the 53 percent in the 2007 survey. Another 7 percent this year said they plan to start contributing with the next two years.

Compare that to the average for all U.S. companies with 25 to 99 employees: 55 percent don't offer any kind of retirement plan, traditional pension or 401(k), the Employee Benefit Research Institute found in 2006. And for all U.S. companies with fewer than 10 employees, 84 percent do not.

Because they don't enjoy the same economies of scale, the smallest businesses may have to spend 14 times as much relative to what the largest companies might spend on the cost of administering a 401(k), says the federal Small Business Administration.

The businesses in the NAPEO survey work with professional employer organizations, which set up and administer such plans for their clients as part of their human resources services. This year, the survey shows that half of the surveyed businesses did not have a retirement plan prior to entering a PEO arrangement.

A professional employer organization could be one solution for some companies: It can help cap that cost and provide information about 401(k) plans available for their workers.

"A 401(k) is a great saving tool because it is a legal tax shelter and the assets in the plan are generally protected from the claims of creditors," said Scott Buchanan of Human Resources, Inc. "I can't think of any other provision of the Internal Revenue Code that allows a business owner to take a legitimate tax deduction today for funding the plan, while allowing for the deferral of the income recognition of the part held by the participants, including the business owner."

The Respondents

Three-quarters of the 404 businesses in the NAPEO survey have 50 or fewer workers; of these, 31 percent have 10 or fewer, 24 percent, 11-20 workers, and 21 percent, 21-50. The other quarter have 50 or more, with 11 percent reporting 100 or more.

Of those that indicated their locations, most are concentrated in the central part of the United States (54%), the South Atlantic states (30%), and the Mountain and Pacific states (15%). Just over 1 percent are located in the Middle Atlantic and New England states.

As in prior surveys, the largest portion of the businesses (23%) are in the services industry; the next largest sector (12 percent) are nonprofits; eight percent are retailers, and another 8 percent are manufacturers. Seven percent report they are in the construction industry. Less than 5 percent are in a variety of other industries.

Methodology: NAPEO conducts the survey each quarter by asking its member PEOs to involve the owners and operators of businesses they serve. The PEOs determine which clients will be involved. NAPEO sends to the PEOs the link to the survey questionnaire, which is located on a secure Web site managed by Industry Insights. All answers are anonymous, and the business owner's involvement is entirely voluntary. The survey took place February 12-26, 2008.

Industry Insights, headquartered in Columbus, Ohio, is a professional research and consulting firm providing management and marketing services to trade and professional associations and their members.