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. 

Closing the "Opportunity" Gap

There’s no one silver bullet likely to close the nation’s retirement plan coverage gap—but the target is pretty easy to spot.

As it turns out, the nation’s retirement plan access coverage gap is almost exclusively found among small businesses, and it’s not hard to imagine why. The failure rate for small businesses is daunting—and those who’ve managed to avoid that fate are doubtless focused on trying to avoid becoming a statistic. Under those circumstances one can well appreciate that offering benefits, much less RETIREMENT benefits, probably seems like a luxury for another time, if not another business.

A recent issue brief by Anqi Chen and Alicia Munnell of the Center for Retirement Research (CRR) at Boston College examined the issue, and drawing on previous research[i] cited the following three main barriers:

• uncertain revenues that make it hard for a firm to commit to a plan;
• employee preferences for wages and other benefits;[ii] and
• the cost associated with establishing and administering a plan (this latter included an assumption by some/many that employer contributions were required).

Indeed, surveys seeking to better understand this reluctance generally find two major obstacles: cost and complexity of administration. And that was before the recent economic downturn. 

Starter Up!

Enter the SECURE 2.0 Act of 2022 which, among its 90-some-odd retirement plan provisions, contains two that are squarely fixed on resolving those issues. The first of these is the so-called Starter K.  Basically, starting now—employers that have never had a plan can set up a “starter” 401(k) or 403(b) plan. There is no required employer contribution, though employees are automatically enrolled at 3% of pay (they can opt out). While this an actual 401(k)/403(b) plan, it looks more like an IRA, more specifically the type that have been established by a number of states. The limits for employee contributions start at $6,000, indexed to inflation—and there is an additional opportunity for a catch-up contribution of $1,000 for those individuals over 50. However, unlike the traditional 401(k)/403(b), there is no nondiscrimination or top-heavy testing requirements. 

All in all, it’s a straightforward, simple 401(k) design that removes the complexity (and cost) concerns that have held many small businesses back. Conservative estimates prepared for the American Retirement Association suggest that this could provide 19 million working Americans access to a workplace retirement plan that didn’t have that opportunity previously.

Credits ‘Worthy’

But perhaps the biggest incentive found in SECURE 2.0 is the greatly expanded tax credit for new plans.  Under current law, employers with less than 100 employees that adopt a new retirement plan can qualify for an annual tax credit for up to three years equal to the lesser of (1) 50% of the administrative cost of establishing the plan, or (2) $5,000. But, effective for 2023, SECURE Act 2.0 increases that percentage from 50% to 100% for employers with 50 or fewer employees (it remains at 50% for those with 51-100 employees). So, it covers 100% the cost of operating the plan, up to $5,000 (which, I’m told with some confidence is more than the cost of running those size plans). 

More than that, it also establishes a generous new tax credit for contributions made by small employers to a newly established retirement plan (other than a defined benefit plan)—a tax credit that is a set percentage of the amount contributed by the employer for employees up to a per-employee cap of $1,000 (though contributions to those that make $100,000 or more are not taken into account). Better still, that set percentage is 100% for the year the plan is established AND the following year, 75% for the third year, 50% for the fourth year, 25% for the fifth year (0% thereafter). The full amount of the new tax credit would be available to employers with 50 or fewer employees but phases out for employers with 51 to 100 employees. 

MEP ‘Step’

Oh—and for fans of multiple employer plans (MEPs), the start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence (the MEP rule is retroactively effective for taxable years beginning after Dec. 31, 2019).

The reality is that even today more than 30% of all private-sector American workers still lack access to workplace retirement plans and thus lack an equitable opportunity to achieve a comfortable retirement.   Further, nearly 60% of workers in the lowest income classes still lack access to workplace plans. We talk about a “coverage” gap, but it’s really an opportunity gap.     

The challenges confronting small businesses are no less—and arguably even larger now—than they’ve ever been. But, amidst all the economic uncertainty—and with the importance of worker attraction and retention more critical than ever—SECURE 2.0 offers opportunity—not only to strengthen and solidify those workplace bonds—but in the process to help give American workers the opportunity to better prepare for a secure retirement.

- Nevin E. Adams, JD 

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[i] Specifically by the Employee Benefit Research Institute (EBRI), the Pew Charitable Trusts, and the Transamerica Institute.

[ii] Incredibly, the EBRI research, which admittedly went back to 2003, cited as a primary rationale that employees hadn’t REQUESTED the benefit.

Half A Chance...

I’ve never played the lottery. But there are days…

I tell myself it’s because I know how remote the odds are, that the rules are too complicated, that they “feed” on the aspirations of people who should be spending their money on “better” things – and even that I don’t have enough “lucky” numbers to bet on consistently. But those are rationalizations.

The simple fact, despite the screaming billboards and nightly news reminders about the size of the latest “mega” jackpot, is that I simply find it inconvenient. Oh, it’s not like I never frequent the convenience stores or even grocery checkouts that these days beg for the cash/credit card that hasn’t yet been put away. I’ve never really regretted walking away from those “temptations.” And yet…    

As an industry, we spend a lot of time focused on a wide variety of considerations that impact the likelihood of having a financially satisfying retirement. But what about those who don’t have access to a retirement plan?

Now, even thoughtful industry insiders have been known to push back on the notion that people don’t have access to a retirement plan. And, in fact, you don’t have to be an industry insider (though it helps) to know that anyone who doesn’t have access to a retirement plan at work can stroll down to your local bank or financial services outlet and open an IRA – heck, these days you can just boot up your computer and do that online. And yet people don’t. This isn’t really a surprise – but even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Last week, we unveiled a state-by-state analysis that highlighted the coverage gap – that more than 5 million employers in the United States still don’t offer a workplace retirement savings benefit, a generation after the 401(k) plan design was first introduced. And what that means is that more than 28 million full-time workers don’t have an opportunity to save for retirement in a 401(k) – and that doesn’t include more than 23 million part-time workers who don’t have that opportunity.

That is, of course, the coverage “gap” that the so-called state-run automatic IRA programs are designed to close. And, though it’s still relatively early in that particular vein, they do seem to be having a positive effect. In Oregon (whose OregonSaves program has just commemorated its second anniversary), they’re reporting more than 6,856 employers now participating – who ostensibly didn’t offer a plan before – with some 95,704 employees – who, ostensibly, weren’t saving for retirement previously. And if the opt-out rate is high (approximately 30%) compared with the 7-9% rates typical of automatic enrollment plans administered in the private sector, well it not only lacks the support of an employer match (not to mention the support of workplace education or an advisor), but it also has a (still) relatively high 5% default contribution rate, though recent surveys suggest that the default rate standard is rising in 401(k)s.

There are, of course, issues with the emergence of multiple, and potentially contradictory, state-run versions – particularly for employers who draw workers from multiple states. But in just this last year, the program has begun offering traditional IRAs and has been opened to the self-employed, gig economy workers and cannabis businesses. The program is now more than halfway through its statewide rollout, which will be completed by mid-2020, with more new “features and improvements” in the works. Similar programs in Illinois and California are underway, or nearly so – and Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee, has previously proposed a federal version. 

Much of the coverage gap can be laid at the door of smaller employers, which arguably have a different focus on such matters than larger organizations. And, sure enough, a 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that when you adjust for access to a plan – the percentage participating divided by the percentage working for employers that sponsor a plan – you find that participation rates between larger employers and smaller ones largely disappear. For example, while data indicates that just 16.9% of those full-time, full-year employees who work at smaller employers participate in a plan – that turns out to be about 86% of the 19.5% of workers in that category whose employer sponsors a plan. And that is nearly identical to the participation rate of private-sector employers with 1,000 or more employees.

A few years back I remember hearing a lottery motto, “Gotta be in it to win it.” That’s a motto that those worried about retirement finances should always take to heart.

But if they’re going to have (more than) half a chance, there’s something to be said for improving the odds – by having a chance to “play.”

- Nevin E. Adams, JD

Data "Minding"

Just when you thought retirement plan projections couldn’t get any worse…

Last week the National Institute on Retirement Security released a report – “Retirement in America | Out of Reach for Most Americans?” that claimed that the median retirement account balance among all working individuals is… $0.00. Moreover, that same report claims that “57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension.”

It’s not the first time the NIRS has produced reports finding significant problems with the nation’s private retirement system. Indeed, this report “builds on previous NIRS research published in 2015,” though the conclusions presented here seem unusually stark.
Then, as now, the NIRS conclusions rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF) and the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP). The report’s authors acknowledge that the latter “oversamples” lower-income household which, as the report notes, are less likely to be covered by, or to participate in, an employer-sponsored retirement plan.

‘Self’ Sufficient?

The issues with self-reporting have been well-documented – so much so that even the report’s authors acknowledge (albeit in a footnote) that it “…can be problematic for the reporting of account balances and participation in particular types of retirement plans, such as DB pension plans.” In fact, previous research by Irena Dushi, Howard M. Iams and Jules Lichtenstein using SIPP data matched to the Social Security Administration’s (SSA’s) W-2 records found that the DC pension participation rate was about 11 percentage points higher when using W-2 tax records compared with respondent survey reports, “suggesting that respondents either do not understand the survey questions about participation or they do not recall making a decision to participate in a DC plan.” Those authors also found inconsistencies between the survey report and the W-2 record regarding contribution amounts to DC plans. In fact, those researchers found that about 14% of workers who self-reported nonparticipation in a defined contribution (DC) plan had, in fact, contributed (per W-2 records), while 9% of workers self-reported participation in a DC plan when W-2 records indicated no contributions.

Supplementing SIPP survey reports with actual information on tax-deferred contributions in W-2 records, the researchers found that the percentage of employees who were offered a retirement plan increased from 72% in 2006 to 75% in 2012, whereas the participation rate in any retirement plan among all private-sector workers increased from 58% to 61% over this period (a difference that may seem small, but is statistically significant at the 5% level).

Participation, Rated

Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Moreover, when it comes to assessing retirement readiness, the NIRS analysis extrapolates target retirement savings needs based on a set of age-based income multipliers – income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement, although this year the report’s authors acknowledge that those are “rule-of-thumb multipliers and are not based on detailed projections of the income needs of individuals,” all of which, in the authors’ words means that their “analysis in aggregate terms, is broadly suggestive rather than definitive.”

Median, Well…

However, much of the data – and key elements, such as wealth, income, participation and retirement savings – that underlie the conclusions is “self-reported” which, as noted above, even the report’s authors acknowledge “…can be problematic…”. It is perhaps a necessary “evil” when seeking to draw broad-based conclusions from limited samplings, but – particularly when sweeping generalizations are posited based on the medians of such samplings, when labels like “typical” are affixed and assumed without explanation – well, let’s just say that caution in applying the conclusions seems well-advised.

Not that the report is completely off the mark; it points out that those with access to retirement plans are significantly better off than those who lack that access, but also that retirement plan coverage has languished at about the 40% level in the private sector for some time now. Clearly solutions that help work to close this coverage gap, and provide more workers with an easier opportunity to save (let’s face it, nothing stops folks from walking down to their local financial services institution and opening an IRA, but the data suggests that those with access to a plan at work are 12 times more likely to do so) are needed.

Ultimately, the recommendations put forth by the NIRS report authors – to strengthen social security, expand access to workplace retirement plans, and expand the saver’s credit – should serve to narrow the gaps in retirement plan access and adequacy.

Even if the data that outlines the situation – and purports to justify those actions – leaves something to be desired.

- Nevin E. Adams, JD

Will the Administration’s Executive Order ‘Work’?

Over the coming weeks, a question that you’re likely to see posed (again and again) about the President’s Executive Order is – “will it work?”

“Work” in this case means to expand access to workplace retirement plans, for that is the stated policy of the Trump administration in issuing the order.

The answer, of course, will depend in no small part on what emerges as a result. While it’s hard to argue with the underlying principle, and even less with the foundational arguments (“Enhancing workplace retirement plan coverage is critical to ensuring that American workers will be financially prepared to retire” and “Regulatory burdens and complexity can be costly and discourage employers, especially small businesses, from offering workplace retirement plans to their employees”), at this point the order is no more than a directive to the Labor and Treasury Departments to consider and recommend some alternatives.

That said, the directives are reasonably specific – to look into ways to expand access to multiple employer plans (MEPs), and even more specifically, to look into ways to expand access to workplace retirement plans by those with “non-traditional employer-employee relationships,” to review ways to make retirement plan disclosures more “understandable and useful,” including a consideration of a “broader use” of electronic disclosures, and to at least look into and consider changes to the life expectancy assumptions imbedded in current required minimum distribution calculations.

As for the MEP directive – it’s well established that access to a workplace retirement plan has a significant positive impact on retirement security, and on the likelihood that individuals will save for retirement, and so anything that expands access to those programs is a good thing. As for the impact of MEPs, well, providers have long touted the ability of a multiple employer plan structure to expand coverage – and since plans at the smaller end of the market are unarguably sold, and not bought, at a minimum it should make it easier to profitably support and provide services to that market. But again, and as I’ve noted before, all MEPs are not created equal in terms of the security they offer retirement savings – and so, the ability to deliver on those promises will depend on the final recommendation.

While open MEPs – certainly a version that permits non-related employers to join together, and that addresses the “one bad apple” concern – are clearly the big deal in this particular order, the potential impact of the other two initiatives have the potential to be significant. For example, a recent study (underwritten by the American Retirement Association and the Investment Company Institute) of the impact of a shift in e-delivery assumptions found that participants could save more than $500 million per year, assuming about eight participant mailings per year across more than 80 million 401(k) account holders.

As for the impact of a change in the RMD calculations – well, for some people at least, that could provide some relief as well. A new study by the nonpartisan Employee Benefit Research Institute (EBRI) finds that the withdrawal amounts taken by those 71 or older are generally no greater than the RMD. In fact, in 2016, more than three-quarters of those 71 or older took only the amount they were required to take – and so, if they were required to take less, that might well mean savings that would last longer.

So, with any luck at all, this might well add up to more retirement plans, more retirement plan savers, and retirement plan savings that might last longer.

Here’s hoping.

- Nevin E. Adams, JD

Under Covered

Have you heard this one? “Only about half of working Americans are covered by a workplace retirement plan.”

Sure you have. It’s a statistic that is widely cited and reported, both in the mainstream press and on Capitol Hill. It comes from a reliable, objective source (the U.S. Census Bureau’s Current Population Survey) and conjures up a compelling need for action by advisors (and others) hoping and working to expand the availability of workplace retirement plans.

In reviewing the Census Bureau data, the Employee Benefit Research Institute (EBRI) recently noted that, in 2011, 78.5 million workers worked for an employer or union that did not sponsor a retirement plan. That is the “less than half” number cited, and reported, with such vigor.

However, when you look at the data underlying that aggregate number, you find it includes:

• 8.9 million people who were self-employed (and thus arguably are prevented from being covered by their own inaction);
• 6.2 million who were under the age of 21 (who, being under ERISA’s mandated age coverage level, would logically not be “covered”);
• 3.9 million who were age 65 or older (and beyond “normal” retirement age);
• just over 31 million who were not full-time, full-year workers; and
• 16.8 million who had annual earnings of less than $10,000.

When you take those factors into account, it’s pretty easy to see logical reasons why so many workers are not “covered.” When you filter out the overlap between those categories — situations where workers fall into several of those categories simultaneously (for example, workers who are under age 21, have less than $10,000 in annual earnings and are not full-time, full-year workers) — there are about 42.4 million workers whose lack of coverage might logically be attributed to being in one or more of those categories. And yes, that’s more than half of the “uncovered” workers in the CPS analysis.

Not that there isn’t a gap in coverage — unpublished estimates from EBRI drawn from the March 2013 Current Population Survey suggest that approximately 20 million private sector workers earning between $30,000 and $100,000 per year don’t have access to a retirement plan at work. That’s a gap that needs to be filled, and advisors, working with plan sponsors and providers, are working to do so every day.

So yes, claiming that “fewer than half of working Americans have access to a workplace retirement plan” is technically accurate. But while it makes for a compelling headline, it represents a gap in news coverage of the issue that hinders our understanding of the real factors underlying the data, and in the process undermines our ability to address it.

- Nevin E. Adams, JD