America’s retirement savings “gap” was numerically quantified in a report from Pew Charitable Trusts released last year.
Specifically with regards to consumer confidence surrounding retirement readiness, the study revealed that 60 percent of Americans are either somewhat confident or not at all confident in their ability to retire comfortably, with only 22 percent of Americans feeling very confident they’ll retire comfortably.
Pew also said that nearly half of all American workers participate in a workplace retirement plan when offered. What makes this so staggering is that only 58 percent of workers have access to a workplace retirement savings benefit plan, and only 49 percent of the 58 percent taking advantage of these programs.
In real numbers, this represents 30 million full-time working Americans between the ages of 18-64 that lack access to a retirement plan at work.
Barriers to access
When workplace retirement plans are discussed, they tend to focus on 401ks. According to IRS guidelines for 2017, elective deferrals for 401k plans remains unchanged at $18,000. The overall limitation for defined contribution plans increased from $53,000 to $54,000. The catch-up contribution for employees 50 or older remains $6,000, thus increasing the limits to $24,000, and $60,000 for those exercising a catch-up provision.
While there are many advantages that 401k plans offer employees, they are generally onerous to administer and expensive for employers to install and maintain, at least until assets grow. Additionally, there are fiduciary responsibilities under ERISA that the plan sponsor must fulfill in order to maintain proper plan compliance.
Alternative savings methods
Several other retirement plan choices should be considered to address the retirement savings gap described above. Savings Incentive Match Plan for Employees (SIMPLE) IRAs, Payroll Deduction IRA’s and Simplified Employee Pension Plans (SEPs) are three.
We’ll focus on SIMPLE IRAs.
According to both the IRS and the Department of Labor Publication 4334 (Rev. 10-2014), SIMPLE IRAs serve as a comparable alternative when an employer meets two basic criteria:
1) Less than 100 employees earning $5,000 or more, and
2) Another retirement plan (for example a 401k) cannot also be offered in addition to the SIMPLE IRA.
Advantages of offering a SIMPLE are:
- They are easy to set up and maintain;
- Administrative costs are low, especially when compared with 401k Plans;
- Employees have the ability to contribute through payroll deduction on a tax-deferred basis;
- Employer matches are typically of 3 percent, or a fixed non-elective contribution of 2 percent for each eligible employee, regardless of the employees deferral; and
- There generally is no filing requirements and employers do not need to file an annual Form 5500.
Disadvantages of offering a SIMPLE are:
- A penalty of 25 percent for withdrawing money prior to age 59 ½ within the first two years from when the employer initially deposits contributions into the account;
- The employee contribution levels are less than the 401k plan: $12,500 with a $3,000 catch up contribution for employees over the age of 50.
Key takeaways
This retirement gap identified by Pew is partially attributed to a lack of employer-sponsored retirement plans; cost and filing requirements are two reasons why. If we as a country are going to solve for the retirement savings gap that exists, we’ll collectively need to do a better job of addressing retirement plan access in the workplace.
SIMPLE IRAs are less cumbersome to administer and less expensive to maintain that their 401k counterparts, and should therefore be considered.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
The reason SIMPLEs are not used more is that they’re more work to set up and maintain – for the advisor (or let’s call then financial product salespeople). A SIMPLE requires that an individual account subject to all the FINRA/KYC requirements needs to be set up and maintained for each participant. That’s why 401(k)s are pushed even though a SIMPLE would be more appropriate. A free jar of halo polish to you if you’re doing SIMPLEs with groups of more than one or two employees.