Closing the 401(k) Coverage Gap: The ‘Better’ Business Bureau

 The solution to the coverage gap lies through small business—but only about a third have been approached in the past year about offering one, according to a new survey.

That’s not exactly a new revelation—any number of surveys and government data throughout the years indicates that the vast majority of large(r) employers already offer a workplace retirement plan.[i] The coverage “gap” so often held out as a sign of “failure” by the critics of the 401(k) lies almost exclusively among smaller employers. Which means that closing it will require a focus on small business—and understanding the “resistance.”  

At the outset, it’s worth acknowledging a certain truism about small plans (the kind small businesses set up)—they are sold, not bought. Consequently, it was disappointing to see that datapoint about just 31% of the businesses that do not currently offer a plan having been approached in the last 12 months about offering one.[ii] 

That survey finding was included in a recent report by the Employee Benefit Research Institute (EBRI), along with the Center for Retirement Research at Boston College and Greenwald Research. Asked why they weren’t offering a plan, the vast majority (74%) said that their business was either too new or too small. That said, among the highly cited reasons for not offering a plan, nearly as many (72%) said required company contributions are too expensive (yes, they mistakenly assumed company contributions were required[iii]), 70% said their revenue is too uncertain to commit to a plan, and 70% said it costs too much to set up and administer. In sum, most of the resistance came down to financial factors—and considering the failure rate of most small businesses, that’s hardly surprising.[iv]  

Indeed, asked about factors that would encourage them to establish a plan, the most cited reason (by 79%) was an increase in the business’s profits. But the next set of reasons most cited as likely to get small businesses to offer a plan were business tax credits for starting a plan (75%) and a plan with low administrative requirements and/or no employer contributions (74%).

Now, in that context, consider that among the small business owners not offering a plan, almost three-quarters (72%) said they were NOT aware[v] of tax credits up to $5,000 being available to cover the costs of starting a retirement plan—though 78% said the tax credits would make it at least somewhat more attractive to offer a plan[vi]—and more than a quarter (28%) said it would make it MUCH more attractive![vii]

The good news is, courtesy of the tax incentives in the SECURE 2.0 Act of 2022 (and the ability to shatter some myths about plan design), we have a message that could make a real difference in plan adoption—one that would be good for business—and your business—as well.

- Nevin E. Adams, JD

 

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[i] From 2010–2023, the fraction of establishments with less than 50 workers who offered a retirement plan ranged from 42%–52%. For establishments with 50–99 workers, 70%–79% offered a plan, and 78%–91% of establishments with 100 or more workers offered one. See Bureau Labor Statistics, “Employee Benefits in the United States, March 2023,” Historical Tables. https://www.bls.gov/ebs/publications/employee-benefits-in-the-united-sta....  

[ii] However, the small businesses with 50–100 employees were much more likely to have been approached, with 58% saying they had been. On the other hand, that’s roughly (only) half.

[iii] The researchers commented that it was interesting that “the one statement that was not true had the highest percentage of business owners agreeing with it, as 63% of these owners agreed that employer contributions were always automatically vested. In both cases, those offering a plan were more likely to agree with the statements than those that did not offer a plan. Thus, it appears that small business owners don’t understand the potential flexibility in offering an employment-based retirement plan, which is not unexpected, as larger employers typically have experts or access to experts on benefits that would not be available to smaller businesses.”

[iv] Somewhat surprisingly, the administration being too burdensome and the possibility of being out of compliance with government regulations or held liable for investment decisions made by employees—obstacles often targeted in legislation and regulatory safe harbors—were the LEAST likely to be cited as a reason for not offering a plan.

[v] Awareness of these tax credits was different by the size of the business, as 50% of the small business owners with 50–100 employees were aware of the tax credits vs. less than 25% of the small business owners with fewer than 50 employees. Businesses with 10–19 employees were the most likely to say that the tax credits would make it at least somewhat more attractive to offer a plan.

[vi] Despite being lower ranked than the attraction and retention of workers, roughly two-thirds of the small business owners said that tax advantages for key executives and allowing the owner to save for retirement on a tax-deferred basis are reasons for offering a plan—though only about 5% of the small business owners cited each of these as the most important reason.

[vii] Half (51%) of small business owners offering a plan were not aware of the Saver’s credit/match—while 83% of those not offering a plan weren’t aware—though 69% of the small business owners said the Saver’s credit made offering a retirement plan at least somewhat more attractive. 

Love and Money

  How well do you (think you) know your significant other?

The passage of time—shared experiences and the process of getting to know each other reveals much—and yet I learned something new about my partner of some four decades just last week!

That brought to mind one of the favorite game shows of my youth was The Newlywed Game. The show featured four couples—all of which were to have been married less than two years. Each of the contestant couples were separated—then asked a series of questions designed to test these newlywed couples’ knowledge of each other, and in some cases their collective memories (and willingness to share publicly). Points were assigned based on answers that matched—but the most memorable, of course, were the missed matches—and the inevitable response of the spouse who was absolutely CERTAIN of the response of their partner.  

Now, a year of marriage is arguably not long enough to know EVERYTHING about your partner. But, and with Valentine’s Day looming, a couple of industry surveys remind us that, while money can’t “buy me love,” it can be a relationship “breaker.”

Indeed, a new survey by Empower asserts that spending habits (38%) and budgeting (33%) are the money topics most likely to lead to disagreements in relationships followed by financial priorities/goals (20%). Over a third of couples (37%) say money is a big relationship stress point, with Gen Zers feeling the most strain around financial issues (48%). Retirement planning/savings, while on the disagreements list, was pretty far down—cited by only 10%—though one assumes that is largely because of its relatively distant timing impact(s).

Fidelity Investments’ 2024 Couples and Money study notes that 45% of partners admit they argue about money at least occasionally—and more than 1 in 4 couples identify money as their greatest relationship challenge. Fidelity’s survey is interesting in that it—like that old Newlywed Game show—surveys couples individually before bringing their answers together to analyze and identify where couples are doing well with their communication and finances. Those couples give themselves high marks on that score—with nearly 9 in 10 claiming they communicate well or very well with their partner.

On that account, the Fidelity report notes that more than a third of couples miss the mark when it comes to how much income their significant other makes—and more than a quarter (27%) admit to being often frustrated by their partner’s money habits, but say they let it go for the sake of keeping the peace. More than half—but just over half (54%) cite as their top financial concern having enough money saved for retirement. Only about half (57%) work together on making decisions about retirement savings and other long-term goals.[i] The good news is more than half of respondents feel very good or excellent about their financial health and 27% of Boomers say building a financial plan together is their love language.   

Inevitably couples are comprised of individuals who have different interests and aptitudes—and money and finances, in particular, can be a sensitive subject. We’re often caught between a fear of being judged—or convinced that judgement is required in order to achieve financial order, but worried that expressing that concern will lead to arguments—or worse. It’s something to bear in mind this Valentine’s Day amidst all the candy, flowers and romantic dinners. 

One thing seems certain, however; just as healthy long-term relationships are built on trust and openness—so are their healthy finances.

- Nevin E. Adams, JD 

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[i] When it comes to having a vision for retirement, Fidelity found that couples are mostly aligned on how they want to be spending their time—with family, friends, traveling, and their hobbies—though about half (53%) of couples who have not yet retired express conflicting views on how much they need to have saved to retire.

Could Your 401(k)’s Fate Rest on the Winner of Super Bowl 58?

Will your 401(k) be chopped by the Chiefs—or find gold with the 49ers?

That’s what adherents of the so-called Super Bowl Indicator[1] would likely conclude, after all. It’s a “theory” that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time—for 41 of the 57 Super Bowls, in fact. Not that it hasn’t been tackled short of the goal line. 

Portfolio Prognostications

One needs to look back no further than last year’s victory by the (original AFL) Kansas City Chiefs that, according to the Indicator, should have predicted a portfolio predicament for the S&P 500—but wound up with a 25% gain for the year. Or the year before that when the victory by the Los Angeles Rams “should” have been a portent of good times, only to see the S&P 500 slump more than 19% for its biggest loss since 2008. 

And while the previous year’s victory by the NFC’s Tampa Bay Buccaneers bolstered the premise behind the “theory,” the year before that the win by these same Kansas City Chiefs—who have become something of a regular in the big contest—over the then-NFC champion San Francisco 49ers undermined its track record (or did your 401(k) miss that 18.4% rise in the S&P 500?). Or how about the year before THAT when the AFC’s New England Patriots (who once upon a time were the AFL’s Boston Patriots) bested the NFC champion Los Angeles Rams—but the S&P 500 was up more than 30% that year (2019).

Or, looking the other way, the year before that a win by the NFC champion Philadelphia Eagles against the AFC champion Patriots turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before, when the epic comeback by those same AFC champion Patriots against the then-NFC champion Atlanta Falcons failed to forestall a 2017 market surge.

Now, one might think that the real “spoiler” to this market “theory” is the New England Patriots (who not so long ago were perennial Super Bowl participants)—but the year before that, the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

Indeed, one might well wonder why, in view of that consistent string of “exceptions” that we’re still talking about this “theory”—but, as it turns out, that’s an unusual (albeit consistent) break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots (yes, they show up a lot) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title.

It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens—who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. This is where things start to get confusing, as the Ravens, who were the Browns moved to Baltimore in 1995 (though the NFL still views them as an expansion team) filling the hole left by the then-Baltimore Colts’ 1984 “dead of night” move to Indianapolis.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII—those Ravens and the San Francisco 49ers—were, technically, NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on—and took down—one from the old AFL (the New England Patriots—yes, those New England Patriots… again). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers—two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But, as some may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat (dare we say “deflated”?).

And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts (those old Baltimore Colts) beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who, as we’ve already remarked, had roots dating back to the NFL legacy Baltimore Colts.

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until last year, the year before last—oh, and the year before that—and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year—but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody except Patriots fans and disappointed Panthers advocates remember because it was overshadowed by the infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have since returned to the City of Angels) and the Baltimore Ravens (those former “Browns”) did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.[2] And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad?

Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance—and lost—the S&P 500 gained nearly 16%.

Some fun facts to share about the game:

The 2023 game drew between 113 million and 115.1 million viewers—making it the most-watched U.S. telecast of all time.

The 49ers are 5-2 in previous Super Bowl appearances. The Chiefs are 3-2. The two teams have met in the Super Bowl before—in 2020, when the Chiefs came from behind to beat the 49ers in Super Bowl LIV. Early odds have the 49ers a slight favorite, by about 2.5 points. 

This happens to be the first Super Bowl ever played in the state of Nevada (11 states have hosted—knew you’d want to know), and while everyone is saying Las Vegas, it’s actually (technically) taking place in Paradise, Nevada. 

The Chiefs have been designated the home team for the game—and will be wearing red. The team wearing white jerseys in the Super Bowl has won 16 of the last 19 Super Bowls, including the Chiefs in 2023 (though the last time Kansas City won before that they were wearing red).

Among other things (whether Taylor Swift will make it to the game on time), you can (even) bet on the color of the Gatorade that will be dumped on the winning team's coach.

All in all, and particularly in view of the exciting playoff games that have led up to it, it looks like it should be a good game.

And that—whether you are a proponent of the Super Bowl Theory or not—would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

 

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[1] An alternate theory linking the Super Bowl to stock market performance in reverse fashion postulates that Wall Street’s results can be used to predict the outcome of the game. According to this theory, if the Dow rises from the end of November until Super Bowl game day, the team whose full name appears later in the alphabet will win. Some people have too much time on their hands…

[2] Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

How to Craft a 401(k) Crisis

Last week an article in an industry publication led with the title “401(k) experiment has failed, fueled U.S. retirement crisis, labor economist says.”

In what I am sure generated a fair number of “clicks” that turned out to be the pronouncement of none other than Professor Teresa Ghilarducci, teeing up a new book[i]—one that she says aims to review the last 10 years of research by multiple entities on something she’s labeled the “liminal” period of life—that apparently intended to refer to an “intermediate” stage of life. According to the article, she is taking aim at certain assumptions that are made with regard to retirement investing/saving between the ages of 55 and 70. Bad assumptions, apparently.

Now, considering that Professor Ghilarducci has written an entire book on this particular subject, extrapolation from a short interview about it (particularly when someone else did the interview) is a hazardous undertaking. But in that article—based on the upcoming book—she asserts that “experts and professionals and policymakers” have got it wrong; in this case “wrong” appears to be thinking that when people get to be about 62 and realize they don’t have enough resources to do so—they’re simply counseled to work longer. She also takes issue with the advice promulgated by a number of experts (and advisors) that folks should postpone taking their Social Security benefits—something she says (in the article) that “does not speak to the lives of most Americans.”

On the latter point (and I hope you’re sitting down), I completely agree.[ii] The logic in that advice is based on a solid strategy designed to maximize Social Security benefits—but increasingly is “buddied” by financial professionals/experts with the approach of using what may be inadequate retirement savings to bridge living expenses between leaving the workforce for good and age 70. That said, and as the article acknowledges, the decision to leave the workforce for good often isn’t a choice, which not only shortens the accumulation opportunity, but extends, and thus undermines the ability to stretch those savings.  Particularly when that happens late in one’s career, there’s no question it creates problems, and surely for some, financially insurmountable ones.

While that apparently isn’t the focus of the book, those type misapplications do seem to be at least a contributing factor to the crisis Ghilarducci perceives. More than that, she apparently sees an overarching theme at work here. In the interview she says that some unnamed “experts and professionals and policymakers” have embraced this notion if you find yourself later in your career short of funds, you simply have to work longer—a presumption she claims is further undermined by the debt carried by those heading into retirement. THIS she says is undermining retirement security, though in the article she lays the fault for this (“much of the loss of their security”) on the loss of defined benefit plans, before proceeding to label the 401(k) an “experiment,” and a “failure”—labels she has applied to these programs…repeatedly. 

On this, as you might imagine, we disagree. Now, I’ve got no beef with the comfort of a federally insured and well-funded defined benefit plan, particularly those in the private sector that traditionally required no involvement with[iii] or investment by individual participants. Of course, even at the height of their popularity, fewer than a third of private sector workers were ever covered by those plans, and only about 1 in 8 of those ever met the service length criteria to fully vest in those benefits. As retirement coverage “experiments” go, those are surely shortcomings.

Indeed, when you consider the coverage gaps left by the defined benefit “system,” I don’t know where we’d be without the 401(k)—or, more precisely, I do—and it wouldn’t be a good place. 

Those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale.[iv] Academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And they routinely completely discount and/or ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. With all its admitted imperfections, thanks to this “failed experiment,” tens of millions of Americans now have trillions of dollars of retirement savings set aside…and they—and their employers—have done so voluntarily, deferring, not avoiding, tax obligations. 

No, as “experiments” go, it seems to me that the real failure is that not enough Americans have the opportunity to do so. And we’re working on that.

 - Nevin E. Adams, JD

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[i] Titled “Work, Retire, Repeat: the Uncertainty of Retirement in the New Economy.”

[ii] In the interests of full disclosure, the author considered, but did NOT defer taking his Social Security benefit until age 70. 

[iii] So little involvement, in fact, that surveys routinely still find ridiculously high number of individuals think they have one. 

[iv] I have never understood the notion that the “rich” are gaming the system with the maximum (in 2024) $23,000 annual 401(k) contribution (not including the $7,500 in catch-up contributions for those over age 50), often less due to the limits of non-discrimination testing.

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