Every day, you tailor purchases to your immediate needs. Do you need a small coffee or an extra-large? Should you use the regular salad dressing or the low-fat version? Is a 12-inch sub or a half-sub on skinny bread the right option?
Your decisions depend on your needs and desires at the time. As consumers, we want the optimal combination of utility and price of goods within our budgets.
The same is true of employers. Not every employer needs or can afford a 401k plan today, but another type of retirement plan might fit the bill.
And, down the road, when the company has grown, a 401k plan may become the right choice.
Unfortunately, there is evidence that retirement plan advisors and intermediaries are not fully addressing the diverse needs of prospective retirement plan clients.
For instance, more than half of small business decision-makers who participated in the 2018 Millennium Trust Small Business Retirement Survey* indicated they had researched retirement savings options for their employees and then did nothing. Many learned about 401k plans and nothing else.
Those employers likely wanted to offer retirement saving solutions for their employees. Perhaps, they looked online or asked a retirement plan provider for advice.
Whatever the approach, those employers that researched and did nothing probably came to the conclusion that his or her business was too small for a retirement plan, or it was too expensive to offer one, because a 401k plan did not meet their needs.
When asked if they would be interested in a retirement plan with no ongoing cost to the employer, 70% of small business decision-makers surveyed said they would welcome the option and implement it within 24 months.
We know there is demand for retirement plan solutions, but the supply of well-understood options does not align with the immediate needs of small businesses. While ‘no-cost’ can be a no-brainer, there is also demand for plans that are generally less expensive and easier to administer than 401k plans. Three-quarters of employers surveyed would be willing to share in employee costs as part of a retirement benefit, with more than half saying they were willing to pay $20 to $50 per employee annually.
A continuum of innovative retirement solutions is also needed to help workers in the gig economy achieve retirement security. The freelance workforce is growing more than three times faster than the overall U.S. workforce. Currently, 8% to 14% of U.S. workers freelance full-time.
Gig economy
A significant number of Americans freelance part-time, in addition to a full-time job. Ironically, one in five seek freelance work primarily so they can save more for retirement according to the 2018 Gig Economy Freelancing and Retirement Betterment Survey.
That’s right. American workers are working side jobs in the gig economy, typically for companies that don’t offer retirement benefits, in an effort to earn more money to save for retirement. Some deposit their savings in banks, while others employ digital savings tools or apps.
Mobile apps are becoming a priority for plan providers. This technology has the potential to simplify plan management and make it easier for small businesses to sponsor retirement plans. Apps could make 401k plans more attractive to some smaller companies, but it won’t make them the right solution for all companies.
Make no mistake: 401k plans remain powerful tools that help millions of employees work toward retirement security. Legislative initiatives around multiple employer plans (MEPs) and government-run retirement plans may expand the number of businesses adopting 401k plans, but they won’t solve all of America’s retirement issues.
The fact remains that 401k plans don’t meet the needs of all businesses. Just like a two-car garage doesn’t meet the requirements of all homeowners, and a size 9 doesn’t fit everyone buying shoes.
The retirement industry is capable of building and delivering an assortment of well-designed plan solutions that meet the diverse needs of businesses. The building blocks for a comprehensive retirement plan infrastructure exist.
Traditional and Roth IRAs, payroll deduction programs, state-sponsored savings plans and marketplaces, Simplified Employee Pension (SEP) plans, SIMPLE IRAs, and 401k plans can meet the need, if these options are packaged in meaningful ways that help employers understand which may best suit their needs.
There are approximately 30 million incorporated small businesses in the United States, and around six million have employees. According to a 2018 report from the Department of Labor, about 560,000 401k plans existed in 2016. There is a lot of opportunity for advisors who can help meet the needs of small businesses.
Helping small businesses understand the diversity of plan solutions available so that they can implement a plan that is the right fit for them, positions advisors and intermediaries for the future.
As small businesses grow, their retirement plan needs are likely to evolve.
*The 2018 Millennium Trust Small Business Retirement Survey was conducted among 500 decision-makers at companies with less than 150 employees that do not offer any type of retirement savings option, and 500 employees who are working full-time at employers with no retirement savings option between September 28-October 8, 2018. The survey was commissioned by Millennium Trust Company and conducted by CITE Research.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
