When ‘More’ Retirement Readiness Is (Much) Less

  A new study shows how a proposed government-run retirement program said to increase coverage could actually undermine the nation’s retirement readiness.

The report — by Morningstar’s Spencer Look and Jack VanDerhei (yes, that Jack VanDerhei) — considers the potential effects of the Retirement Savings for Americans Act (RSAA) on retirement-income adequacy for Generation Z and millennial workers. The proposed legislation — which aims to expand retirement coverage for American workers by creating a federal retirement plan for those not covered through their employer — has been introduced in both the House and the Senate.[i] 

The legislation has been positioned as a means of helping close the coverage gap — of creating not only an opportunity for those without access to a retirement plan at work to save for retirement, but to receive the incentive of a matching contribution from the federal government. How then, would such a proposal undermine the nation’s retirement security?

‘Under’ Mining

As it turns out, in a variety of ways. 

Structurally, and significantly, it directly competes with the existing private retirement system — providing an alternative that employers might well consider rather than adopting a new plan on their own. 

That said, and even more significantly, it seems likely to encourage employers that already provide a plan — and matching contributions — to abandon those in place of the proposed government-run alternative. 

Finally, and compounding the damage of the first two, it does so with a structure that would not only have workers contributing less (generally speaking) than they do with the current system[ii] — and with a match that runs well below that found with the current system.[iii] 

The Damage Done

So, how much damage could this proposal wreak on the nation’s retirement security? The Morningstar researchers found that wealth could decrease by as much as 20% for Gen Z workers and 12% for millennial workers.

Those are some jaw-dropping numbers, to be sure — but the Morningstar researchers apply what seem to be reasonable, conservative estimates to get there.

First, since workers would be able to opt-out of this program, they assumed an opt-out rate roughly half that of the current state-run programs (that don’t have a match) — 20% (that’s about double the rate in private sector plans, which enjoy the backing and support of their employer as well as the convenience of payroll deduction).

More than that, one of the biggest assumptions in the researchers projected impact had to do with employer behaviors in response to the RSAA alternative — and here they used two different scenarios.  In one — a “best case” scenario — they assume that no plans with a thousand participants or more would do so (but that a third of those with less than a hundred participants, and a quarter of those with 100-999 participants would). 

However — the one that they said more likely represents the longer-term impact — they assumed anywhere from a third to 22% of employers of ALL sizes that currently offer a plan would abandon it.[iv]  

The Bottom Line

The research provides valuable insights as to the potential calamitous impact of this proposal on the nation’s retirement security — its introduction ironically just ahead of when some of the more impactful provisions of the SECURE Acts on new plan formation are scheduled to take hold. 

There is, however, yet another factor that could even more dramatically impact these projections — something that the bill’s sponsors have, for the very most part, avoided speaking to; how would this expansive government match program be paid for? 

The answer to that question — which might well have an even more deleterious impact on retirement security — was at least hinted at a couple of months back by the RSAA’s sponsor Sen. Hickenlooper — who said that he’d be willing to lower 401(k) tax incentives and contribution limits to pay for this program.

Talk about robbing Peter AND Paul…

- Nevin E. Adams, JD

 

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[i] Sponsored by Sens. John Hickenlooper (D-CO) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th), the bill is championed by the Economic Innovation Group (EIG), an organization founded by Napster and Facebook billionaire Sean Parker and Steve Glickman, former Senior Economic Advisor at the National Security Council under President Obama. Rocket Mortgage majority owner Dan Gilbert is a member of the organization's Founders Circle, an advisory board with no governance responsibilities. 

[ii] As the Morningstar study notes, the default RSAA contribution rate of 3% is significantly lower than typical contribution rates in DC plans. For instance, the average deferral rate in Vanguard’s "How America Saves 2024" report was 7.4%. Notably, even workers earning less than $50,000 per year had deferral rates of 5.1% or more.

[iii] “Additionally, employer matches for DC plans do not start to phase out for workers earning more than the median income level,” the study explains. “Therefore, for many workers, including those earning less than median income, participation in an employer sponsored DC plan would result in larger overall contributions than the RSAA federal account. Results for the RSAA improve when we assume federal program participants increase their savings rate to 7%, as those earning less than median income would get the full 5% federal match tax credit (the "Above Default Saving" scenario). However, while some participants would save at a higher rate, most participants are likely to contribute at the default. This is because the RSAA does not include an auto escalation feature, which is a key driver of the higher contribution rates seen in DC plans.”

[iv] “To elaborate, the RSAA would likely stymie new plan creation, and while the change may primarily affect smaller plans in the short term, we do think that access to plans, even with larger employers, would go down in the long run.”

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.

The Enemy of the ‘Good’

 A reader recently commented, “Nevin: You are continually berating those who question various aspects of 401(k) plans as if the current structure is ‘perfect.’ It isn’t.”

That comment was inspired by a recent column of mine critical of a proposal rumored to be under contemplation by the Biden campaign—one that would “trade” the current tax preferences of 401(k) deferrals for a flat government tax credit. It’s a proposal that is intended to direct more of the same amount of government expenditure (when the government doesn’t take money from your pay, it’s considered an expense) to lower income individuals, in that a flat dollar credit would ostensibly be worth more to lower income individuals than the deferral of taxes under the current system. 

Now that reader went on to offer a comment in support of that intent, explaining that “…one of the biggest challenges we face is getting lower paid people to participate. Credits will give bigger benefits to these people, and maybe, just maybe, spur increased participation,” closing by challenging me to “…work to make 401(k) plans BETTER, and not simply berate those who challenge the current system. It ain’t perfect, my friend. Far from it.”

Now, as it so happens I know this particular reader. And so I know that he cares deeply about retirement savings and retirement savers, that he’s one of the many out there who are truly working every day to make things “better.” 

That said, if he read my criticism of this proposal to be an assertion that the current system has no faults or shortcomings—well, that wasn’t my point. I have never said the current system was perfect, and in fact, dedicate any number of these columns to highlighting needs/opportunity to make it better.

Beyond that, my experience has been that when those kind of assertions are published[i] (even as an “op-ed”) by a reputable news organization—well, left unchallenged, the assertions are often assumed to be accurate. Indeed, every time something like this makes its way into circulation, I will hear from a half dozen different advisors (or more) telling me that the article has been passed on to them by plan sponsor clients (or participants), looking for comment, or response (and often asking me for assistance in that regard). Indeed, those are the kind of things that tend to get routed to those in academia and on Capitol Hill by those who see it as an affirmation of their notion that the current system is inadequate or biased in favor of the well-off. 

However, it’s one thing to press for change, but something else altogether to do so without fully thinking through (or at least acknowledging) the potential implications of that change—what are generously referred to as the “unintended” consequences, but sometimes seem more a willful and deliberate disregard. In this particular case a federal tax credit at the expense of having a workplace savings plan or an employer match doesn’t seem like a good trade-off to me. Moreover, making broad generalizations about fees (that don't seem supported by data) to justify a call for undermining valuable support for participants and employers doesn’t strike me as being a well-reasoned argument for change/improvement. 

To me the biggest shortfall of the current system is that too many working Americans don’t have the opportunity to take advantage of it. Oh, there are plans that still pay too much in fees, that either don’t avail themselves of the services of a plan advisor, or rely on the counsel of one that isn’t qualified, plans run by fiduciaries who either aren’t aware of that responsibility or fail to fulfill it. The system, in total, isn’t perfect—but those who pick at those imperfections to justify its wholesale demise should be challenged and held to account for misstatements and exaggerations, and they should be willing—and able—to consider and respond to questions—and data—about the ripple effect of unintended consequences. 

Never forget that “perfect” is often the enemy of the good. 

- Nevin E. Adams, JD

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[i] Warning: I’ve been at any number of symposiums or roundtables—and even read the occasional op-ed—where the words of a well-intentioned industry leader are served up as an “admission” of failure of the current system. 

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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

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

(Re) Solving the Retirement Crisis

Several weeks back, I was invited to participate in a group conversation on retirement and the future.

The group of 15 (they’re listed at the end of the document that summarized the conclusions) that Politico pulled together was diverse, both in background and philosophies, and included academics, think tanks, advocacy groups, and the Hill. It was conducted under Chatham House rules, which means that while our comments might be shared, they wouldn’t be specifically attributed. That latter point was helpful to the openness of the discussion, where several individuals had opinions that they acknowledged wouldn’t be supported by the groups they represent.

The conversation touched on a wide range of topics, everything from the key challenges to the current system, the private sector’s role in addressing these problems, the individual’s role (and responsibility) for securing their own retirement, government’s role and the potential for current congressional proposals to have an impact.

In view of the diversity of the group – the complexity of the topics – and the 90-minute window of time we had to thrash things about – you might well expect that we didn’t get very far. And, at least in terms of new ideas, you’d be hard-pressed to say that we discussed anything that hadn’t come up somewhere, sometime, previously. But then, this was a group that – individually, anyway – has spent a lot of time thinking about the issues. And there were some new and interesting perspectives.

The Challenges

It seems that you can never have a discussion about the future of retirement without spending time bemoaning the past, specifically the move away from defined benefit plans, and this group was no exception. There remains in many circles a pervasive sense that the defined contribution system is inferior to the defined benefit approach – a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And while you can wrest an acknowledgement from those familiar with the data, almost no one talks about how few of even those covered by those DB plans put in the time to get their full pension.

Beyond that. there was a clear and consistent understanding in the group that health care costs and concerns were a big impediment to retirement savings, both on the part of employers and workers alike. People still make job decisions based on health care – on retirement plan designs, not so much. And when it comes to deciding whether to fund health care or retirement – well, health care wins hands down.

College debt was another impediment discussed. Oh, individuals have long graduated from college owing money – but never so many, and likely never so much (though you might be surprised what an inflation-adjusted figure from 20 years ago looks like). It is, for many, an enormous draw on current income – and one that has a due date that falls well before when retirement’s bill is presented for payment.

Women have a unique set of challenges. For many, the pay gap while they are working is exacerbated by the time out of the workplace raising children. They live longer, invest more conservatively, and ultimately bear higher health care costs – and increasingly find themselves in the role of caregiver, rather than bringing home a paycheck.

For many in the group, financial literacy still holds sway as a great hope to turn things around. There are plenty of individual examples of its impact, though the current research casts doubt on its widespread efficacy. Surely a basic understanding of key financial concepts couldn’t hurt (though don’t even get me started on the criteria that purports to establish “literacy”) – but it’s a solution that is surely at least a generation removed from the ability to have a widespread impact.

On a related note, the group was generally optimistic about the impact that the growing emphasis on financial wellness could have, both in terms of encouraging better behaviors, and a heightened awareness of key financial concepts. The involvement of employers, and employment-based programs seems likely to enhance the impact beyond financial literacy alone.

Resolving Recommendations

Ultimately, the group coalesced around four key recommendations:

The significance of Social Security in underpinning America’s retirement future – and the critical need to shore up the finances of that system sooner rather than later. The solution(s) here are simple; cut benefits (push back eligibility or means-testing) or raise FICA taxes. The mix, of course, is anything but simple politically – but time isn’t in our favor on a solution.

The formation of a national commission to study and recommend solutions. I’ll put myself in the “what harm could it do?” camp, particularly in that, to my recollection, nothing like this has been attempted since the Carter administration. We routinely chastise Americans for not taking the time to formulate a financial plan – perhaps it’s time we undertook that discipline for the system as a whole.

Requirements matter – but don’t call it a mandate. Since it’s been established that workers are much more likely to save for retirement if they have access to a plan at work (12 times as likely), but you’re concerned that not enough workers have access to a retirement savings plan at work, there was little doubt that a government mandate could make a big difference. There was even less doubt that a mandate would be a massive lift politically. And not much stomach in the group for going down that path at the present.

Expanded access to retirement accounts. While the group was hardly of one mind in terms of what kind of retirement account(s) this should be, there was a clear and energetic majority that agreed with the premise that expanding access is an, and perhaps the – integral component to “securing retirement” for future generations.

And maybe even this one.

- Nevin E. Adams, JD

p.s. I'm on the left, towards the top of the picture above.  Right next to Teresa Ghilarducci!

5 Reasons Why Your Small Business Should Offer a Retirement Plan

People who don’t have access to a plan at work don’t save for retirement. Here’s why small business owners should care.

About half of private sector workers did not participate in a workplace retirement savings program in 2012, and a recent report by the Government Accountability Office (GAO) found that most workers who did not have coverage lacked access to such programs.

While there are many reasons that might account for those individual decisions, among those not participating, the majority worked for an employer that did not offer a program or they were not eligible for the programs that were offered. In particular, lower income workers and those employed by smaller firms were much less likely to have access to programs, after controlling for other factors. However, the majority of these workers participated when they had workplace access.

Here’s why small businesses should provide that access.

To attract and retain workers.

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. But it’s a bit more complicated than that. The reality is that a larger employer that does not offer a retirement plan benefit sticks out like a sore thumb.

However, among smaller employers, the situation is almost a mirror image. In fact, the GAO reports that only 14% of small employers with fewer than 100 employees sponsor a plan in which workers can save for retirement.

The opportunity for smaller employers then, is to stand out from your competition precisely because you do offer a workplace retirement plan.¹ And to use plan design features such as vesting and an employer match to keep the good workers you’ve attracted, and maintain that competitive edge.

Your workers will use it.

This may seem obvious, but among the more intriguing rationales offered by small businesses for not offering a workplace retirement plan was one put forth in a 2003 Small Employer Retirement Survey by the Employee Benefit Research Institute (EBRI) — that their employees are “not interested” in having a retirement plan. And I have actually had plan sponsors say to me “nobody has ever asked about a 401(k).” Well, I’ll grant you that workers are probably more concerned about their paycheck, and perhaps health care. And they may just be glad to have a paying job, and don’t want to rock the boat by pressing for benefits.

That said, the vast majority of workers who do not participate in a workplace retirement plan – 84% — reported they did not have access to a workplace retirement program. Of two key access factors — the employer must offer a program, and the worker must be eligible to participate — GAO found that the lack of access was primarily due to employers not offering a retirement program (68% reported they worked for an employer that did not offer a program, and another 16% reported they were not eligible for the program their employer offered. Indeed, the GAO report found that workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms.

Your workers need it.

You may well employ a workforce that has alternative sources of retirement income — a legacy from that rich uncle everyone’s so fond of, or maybe they have a surefire lottery strategy. Or perhaps their pension or savings from a prior employer, combined with Social Security, will be “enough.”

But EBRI’s 2014 Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course — but it’s a big part of it.

You need it (too).

It’s not unusual for a small business owner to invest heavily in the enterprise, including sinking some of their own personal retirement savings into “the business.” Whether you have or not, and no matter how much you are now able to pursue your passion, you’ll want to provide for a retirement at some point that doesn’t necessarily require liquidating your business to fund it. That’s when the benefits that your employees appreciate can pay off for you as well, including:

• The availability of pre-tax contributions that can reduce your current taxable income.
• Deferral of taxes on pre-tax contributions and investment gains until you take a distribution.
• The flexibility of a Roth 401(k) (if offered).
• The “magic” of compounding returns over time.

Oh, and there are tax advantages. 

Despite all the compelling reasons outlined above, for some it still (rightly) comes down to the bottom line. And, in addition to the benefits of offering a plan, there are some tax advantages designed to encourage you to do so.

Any employer matching contributions will be tax-deductible, as will any costs incurred by the employer in connection with offering the plan. Better yet, you may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan.
But don’t take my word for it — here’s what the IRS has to say.

Let’s face it, there are any number of reasons to put offering a workplace retirement plan — not enough time, worries about the expense, a sense that this is something better put off to a future time.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

Nevin E. Adams, JD

1. A growing awareness of the coverage “gap” among smaller employers has led a number of states to consider a variety of initiatives that, generally speaking, include a requirement that employers above a certain size/business longevity threshold offer a payroll deduction IRA option to their employees. The Obama administration is lending its support to these efforts, with some additional regulatory clarity anticipated before the end of the year.