The infrastructure supporting retirement in the United States has changed dramatically during the past two decades.
Today, company pension plans have a lot in common with Route 66, the Main Street of America and one of the most well-traveled highways in our country—until the mid-1980s when it was removed from the U.S. highway system.
Pensions are still around, as are segments of US 66, but they’ve become scarce and contribute far less to retirement security than they once did.
However, instead of being replaced by multi-lane highways that allow travelers to reach their destinations more quickly, many pensions have been replaced by a variety of employer-sponsored retirement plans that have the potential to help Americans reach retirement security, as long as certain obstacles can be overcome.
The two most important obstacles on the road to improving Americans’ retirement security are plan access and plan participation.
A 2019 survey from the National Institute on Retirement Security found that “even when accounting for an individual’s entire net worth—considered a generous measure of retirement savings—more than three-fourths (77 percent) of Americans fall short of conservative retirement savings targets for their age and income based on working until age 67 … This massive retirement savings shortfall can be attributed to a decades-long degradation of our nation’s retirement infrastructure. Most of the workforce lacks an employer-sponsored retirement plan, fewer workers have stable and secure defined benefit (DB) pensions, while 401k-style defined contribution (DC) individual accounts provide less savings and protections.”
Expanding plan access
The need to expand plan access is surprising to many people. 401k plans appear to be ubiquitous, but they’re not. According to the Investment Company Institute, there are 555,000 401k plans in the United States.
These plans cover 100 million workers, and about 80 million are active plan participants.
That’s impressive until you realize there are 5.6 million employers in the United States. The disparity between the number of 401k plans and the number of employers helps clarify why 43% of private-sector workers do not have access to workplace retirement plans.
As a general rule, the smaller the company, the less likely it is to sponsor a retirement plan. In the United States, almost 90% of private sector companies have 20 or fewer employees.
In recent years, policymakers and retirement plan professionals have made efforts to improve plan access for workers at smaller companies. Some states have required employers to participate in state retirement savings programs or sponsor their own plans. In addition, the federal government finalized the rules for multiple employer plans (MEPs) in July, making it possible for smaller employers to gain economies of scale by jointly sponsoring retirement plans.
These are both valuable options, but they’re unlikely to give all working Americans access to a retirement plan. Some small employers won’t be able to afford defined contribution plans, even as part of a MEP. Some will be concerned about the potential complexities of unwinding MEPs. And some will be reluctant to participate in government-run plans.
Pew Research reported that just 53% of small-to-mid-sized businesses sponsored retirement plans in 2017. The report explained, “Firms that are more likely to offer retirement plans are often older and larger, have more full-time employees, outsource their payroll, or have had increasing earnings in recent years. The likelihood of adding a plan grows fastest in a firm’s first few years or as it approaches 75 employees.”
The primary reasons smaller companies did not sponsor plans were cost (37%) and a lack of organizational resources necessary to introduce a plan (22%).
To expand plan access, we need to deliver cost-effective retirement plans to smaller businesses. When companies are concerned about the cost and administrative complexity of 401k plans, advisors should not walk away. They should introduce less expensive plans with streamlined administration, such as SIMPLE, SEP, and Payroll Deducted IRA plans.
Wealth management and retirement plan advisors may want to think of these sales as door openers. IRA-based plans don’t offer a big payday, but they create opportunities to meet the wealth management and business planning needs of business owners and executives, as well as opportunities to transition companies into 401k plans as the firms grow larger and employ more people.
Improving plan participation
In recent years, we’ve seen tremendous improvement in plan participation. Thanks to automatic plan design features, including automatic enrollment and automatic deferral increase, 77% of workers with access to workplace plans participate in those plans.
Automatic enrollment has become the norm for 401k plan sponsors. According to the Callan 2019 DC Trends Survey, the vast majority (93%) automatically enroll new workers, and about one-fourth complete a single sweep or recurring sweeps of all employees.
Many plans that have adopted automatic enrollment also have automatic contribution-increase features. The average default contribution rate in 2019 was 4.6% of wages, and the average automatic increase was 1%. Many companies have no cap on contributions.
These features have dramatically changed the employer-sponsored retirement landscape since their introduction as part of the Pension Protection Act of 2006. Similar features and innovations for alternative retirement plans may help increase participation while simultaneously helping to close the coverage gap.
Building the right infrastructure is critical
By expanding plan access and improving participation, retirement plan professionals and policymakers can strengthen the infrastructure supporting retirement security in America.
There are many ways to expand access to workplace plans, but a critical focus is smaller employers. In some cases, small companies will not be able to afford defined contribution plans, even when they have improved economies of scale. In these cases, advisors can serve their communities and the country by offering cost-efficient options that open the door to future sales in other areas.
We’ve made tremendous progress improving participation in defined contribution plans. It’s time to extend some of those gains to smaller employers, lest America’s retirement system continues to leave small business behind like towns along Route 66.
Kevin Boyles is a vice president and business development director at Millennium Trust Company, LLC. Kevin has nearly 20 years of experience in the retirement plan and health savings marketplace. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
Kevin Boyles is the President at Superior IRA & HSA.
