Despite the existence of a plethora of retirement savings vehicles from IRAs to annuities, most Americans have proven unwilling or unable to save for retirement on their own. Earlier this year, research from The Pew Charitable Trusts reported that less than 15% of Americans save for retirement outside of workplace retirement plans.
Americans’ dependence on their employers to provide opportunities to save for the future means that solving the retirement insecurity problem in the United States will depend, in part, on increasing access to workplace retirement plans.
It’s a circumstance that transfers responsibility to company owners, plan sponsors and retirement plan providers. These groups have worked diligently during the past two decades to identify solutions that will help Americans save enough to live comfortably throughout retirement.
Recent 401k plan design innovations have helped nudge employees into better retirement saving decisions. According to Vanguard, plan features, including automatic enrollment and automatic contribution increases, along with the availability of target-date funds, have led to an improvement in plan participation rates and participant portfolio choices.
Despite these advances, Americans remain woefully underprepared for retirement. While more workers are saving and setting aside larger amounts of income for retirement, most are not doing enough to retire comfortably. The most recent Transamerica Retirement Survey of Workers (April 2019) found:
- 71% of Millennials are saving for retirement. Their estimated median account balance is about $23,000.
- 77% of Gen Xers are saving for retirement. Their estimated median account balance is $66,000.
- 78% of working Baby Boomers are saving for retirement. Their estimated median account balance is $152,000. Sixty-nine percent anticipate working past age 65 or do not plan to retire.
While higher percentages of workers are saving, there is a disparity in plan availability in public and private sectors. The Department of Labor estimates that one-in-three private-sector workers do not have access to workplace retirement plans.
The lack of access is more common among smaller companies. Just 53% of workers at small private companies have the opportunity to save in an employer-sponsored plan, while 85% of workers at larger companies have access.
Retirement policy initiatives, including state-mandated workplace IRA savings plans and Multiple Employer Plans (MEPs), have helped expand plan access but they have not solved the problem. Educating small employers about IRA-based retirement savings plans has the potential to improve plan availability, but a better answer may be found with payroll providers.
The primary reasons small employers do not sponsor retirement plans are cost and a lack of understanding about their options. They are often poor candidates for 401k plans, and the plan types that better suit their needs—think SIMPLE, SEP or Payroll Deducted IRAs—are not lucrative to the salesperson, or in some cases, not an option.
The lack of incentive for providers, paired with a lack of understanding among small employers, helps explain why so many private-sector workers do not have access to a workplace retirement plan. To help put this amount into perspective, in 2015, there were 5.9 million employers in the United States, but only 560,000 active 401k plans in 2016.
Where payroll providers play a role
According to a 2017 Ernst & Young Global Payroll Survey, 62% of businesses are outsourcing some portion of their payroll servicing. Payroll providers already handle direct deposits for a captive audience of businesses, so they are well-positioned to deliver retirement plans to their clients by integrating payroll and plan management.
The potential advantages to both payroll providers and employers include:
- Single point of contact: When a single firm is responsible for both payroll and plan administration, employers only have to deal with one point of contact for both of these critical functions.
- Streamlined data management: When one entity is responsible for both functions, it is easier to track eligibility and keep participant data up-to-date.
- Ensuring data security. The security of plan participants’ personal and financial data is becoming a serious and expensive issue for plan sponsors. Payroll firms may be better equipped to manage the transfer and storage of sensitive data.
- Flexibility and affordability. By partnering with an established retirement firm, payroll providers can offer multiple plan options like SIMPLE, SEP and Payroll Deducted IRAs to their clients that typically cost less than a 401(k) plan.
Beyond these operational benefits, payroll providers that decide to offer retirement plans as part of their suite of services may strengthen their relationships with existing clients and create a differentiator when prospecting for new clients.
The employers may reap additional benefits, including reduced turnover, too. Small businesses tend to have higher employee turnover (2.8%) than larger businesses (1%)[1], but offering workplace retirement options can help with recruiting and retaining talent.
In addition to helping recruit and retain talent, plan sponsors and providers know that workplace plans can potentially help employers boost employee morale and help them financially prepare for retirement. Sponsoring a great plan may even improve profitability, according to a paper from T. Rowe Price. The firm contends there are,
“…significant correlations between 401k plan performance and corporate financial performance. And the correlations don’t just occur in large, highly profitable companies, but in companies of all sizes and in all industry sectors.”
Some larger payroll providers already have their own retirement recordkeeping business, but that approach is likely too expensive and involved for a typical regional or even local payroll provider. For mid-market firms that are interested in offering retirement benefits to clients, partnering with a retirement provider that specializes in solutions for small businesess may provide an easier path to entry.
Eliminating retirement insecurity is a challenging and multi-faceted pursuit. Payroll providers may be another avenue for smaller employers to sponsor retirement plans cost-effectively. While some may dislike the potential industry disruption, it’s important to keep an eye on the real goal: improving Americans’ retirement security.
[1] https://www.zenefits.com/workest/small-businesses-people-problem/
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.
