57 million. 65 million. 40 million. 70 million.
No, it’s not guess of the number of points my beloved Denver Broncos will give up during the 2023 NFL season (admittedly written not long after the Dolphins put up a 70-spot on the since-resurgent Broncs). Cited by a variety of sources, they are all different but undeniably sizable recent estimates of the number of American workers who lack access to a workplace retirement savings plan.
That’s called a coverage gap, and how to bridge it is perhaps the biggest challenge facing the private retirement plan business today.
• Editor’s Note: This is the cover story from 401(k) Specialist Magazine Issue 3 2023. To read the magazine in its entirety, click here.
In mid-October, the latest Mercer CFA Institute Global Pension Index that ranks the world’s retirement systems gave the United States a C+ grade and ranked it 22nd out of 47 countries.
According to The Wall Street Journal, America got dinged for having some major shortcomings in its system where retirement is funded primarily through Social Security and savings in 401(k)s and IRAs.
The report said that while there’s good coverage of white-collar workers through employer systems, employers aren’t required to provide retirement plans to all workers. And while automatic enrollment in 401(k) plans has helped improve participation and boosted retirement savings, it noted that many Americans still don’t have access to a 401(k).
You’ve heard it before and you’ll hear it again: too many Americans—particularly those working at small businesses and lower-income jobs—lack access to workplace retirement savings plans.
About a year ago, Lisa Kottler, Chief Growth Officer with Sallus Retirement, told 401(k) Specialist that there were still somewhere in the neighborhood of 5.4 million businesses in the United States that don’t offer a workplace retirement plan, which equates to 65 million employees without coverage.
Kottler noted that 98% of the U.S. employer market has less than 100 employees, and 90% has less than 20 employees. “That is not who we have built plans for. We built plans for mid to large companies with margins, and we could make money. That’s a big part of the disconnect.”
Urgency to Bridge Gap Building
There is an increasing sense of urgency building for the private retirement industry to aggressively attack the coverage gap—and that urgency is coming from not just the industry itself, but from lawmakers and regulators who think the industry isn’t doing enough to reach small businesses and lower-income workers.
And pressure is really ramping up now after significant bipartisan retirement reform legislation in the form of the SECURE Act and SECURE 2.0 passed in 2019 and 2022, with many provisions delivering a wealth of new tools and incentives for small businesses to begin offering retirement plans.
Nevin Adams, who recently stepped back from day-to-day duties as Chief Content Officer of the American Retirement Association but remains active in the industry, says the industry better make good use of these new tools—and fast.
As the emcee at the LeafHouse National Retirement Symposium in Austin in October, Adams provided a stern warning to retirement industry leaders attending the event.
“We have been given two great gifts as an industry in the last 3 years—and that was the SECURE Act and that was SECURE 2.0,” Adams said during one of the sessions. “But we had better do something with it, because we have been forestalling a larger government involvement for a long time now in saying we didn’t have the tools we needed to really move this ball along.”
That’s not the case anymore.
“The tools are all there, folks. Our excuse time is running out. So we had better do something with it, because I can promise you that if we don’t, there are forces out there that are going to say, ‘you’ve had your 50 years—ERISA’s going to be 50 years old in 2024—now it’s time for the big boys to step in and do your job for you.’”
As a matter of fact, a bipartisan bill just reintroduced on Capitol Hill would like to do just that, as the American Retirement Association sees it.
The ARA has made it clear that it does not want the federal government stepping into the workplace retirement market with a new plan based on its own Thrift Savings Plan, which is the idea behind the new proposed legislation called the “Retirement Savings for Americans Act.”
That legislation, first introduced last year and reintroduced on Oct. 19, aims to open up access and increase participation by enacting a federal retirement savings program aimed at low-income workers.
“Roughly 40 million Americans lack access to an employer-sponsored retirement plan, which represents a significant roadblock to achieving financial security for their retirement,” said Sen. Thom Tillis (R-NC), one of the bicameral bill’s sponsors. “The Retirement Savings for Americans Act tackles this real problem by establishing a pathway for savings for Americans lacking retirement options.”
Under the proposal, all uncovered or excluded employees would need to be auto-enrolled into the program at 3%. It would be exempt from ERISA and nondiscrimination testing even if the owner participates. The federal government—not the employer—would provide the safe harbor match and 1% non-elective contribution. It would supposedly be paid for by eliminating retirement savings tax incentives for wealthy Americans.
ARA CEO Brian Graff told attendees at the NAPA 401(k) Summit back in April that such a program could mark the beginning of a “year’s long battle” over the future of America’s retirement system between the private market and the federal government.
The ARA leader likened the “Retirement Savings for Americans Act” to a giant multiple employer plan run by the Treasury Department, and warned that if it were to pass, it would amount to unfair competition that would upend the entire private retirement plan system.
“We oppose the legislation because we believe the provisions in SECURE 2.0 should be given a chance to make an impact and because we believe this proposal creates a federally funded retirement plan to the detriment of the private system by offering a matching contribution only to those in the program, which is not the direction to go with our country’s retirement system,” Graff said in an article posted on the National Association of Plan Advisors website on Oct. 20 after the bill was reintroduced.
The legislation builds upon the recommendations of a 2021 Economic Innovation Group white paper authored by a bipartisan pair of economists, Teresa Ghilarducci and Kevin Hassett.
“The Retirement Savings for Americans Act would address significant and longstanding gaps in the U.S. retirement system that have severely limited participation from low- and moderate-income workers.”
EIG’s John Lettieri
“The Retirement Savings for Americans Act would equip millions of low- and moderate-income workers to build a nest egg for themselves and for future generations, leading to a stronger economy for all Americans in the process,” said Ghilarducci, a labor economist at the New School and leading expert on retirement security.
John Lettieri, President and CEO of the EIG, told 401(k) Specialist in a podcast earlier this year that the program outlined in the legislation seeks to close a gap long neglected by the private retirement plan market, and therefore doesn’t compete against the private plan market.
“The Retirement Savings for Americans Act would address significant and longstanding gaps in the U.S. retirement system that have severely limited participation from low- and moderate-income workers,” Lettieri said in an Oct. 19 press release announcing the bill’s reintroduction. “If enacted, this legislation would result in a healthier retirement system, a more financially secure workforce, and a stronger economy to the benefit of all Americans.”
State Auto-IRA Plans Spur 401(k) Growth?
Instead of a federally run retirement savings plan for private workers, ARA has shown support for the onslaught of state-based auto-IRA plans. One reason is because it turns out the state-mandated plans actually encourage small employers to start their own retirement plans.
At the Aspen Leadership Forum on Retirement Savings in June, one of the “five big ideas about closing the access gap” mentioned in a summary from the meeting, said the automatic enrollment requirements that accompany state-facilitated auto-IRA plans “appear to be prompting many small business owners to offer new private retirement plans to their employees, expanding coverage and creating new business opportunities for the private financial services sector.”
As previously reported in 401(k) Specialist, research from Pew Charitable Trusts found there has actually been significant growth of new 401(k) plans in states that have adopted auto-IRAs.
In the one year after the first three auto-IRA programs launched—Oregon’s OregonSaves in 2017, Illinois Secure Choice in 2018 and California’s CalSavers in 2019—there was a remarkable 35% higher growth rate among new 401(k) plans at private businesses in those states compared to other states.
According to the Center for Retirement Initiatives at Georgetown University, at least 25 states and the District of Columbia have introduced legislation to establish new programs, amend existing programs, or form study groups to explore their options during 2023 state legislative sessions.
As of June 30, 2023, three new auto-IRA programs have been enacted this year: Minnesota, Nevada, and Vermont and one new Multiple Employer Plan in Missouri. Vermont changed its existing program from a voluntary MEP to an auto-IRA program. There are 19 states that have enacted new programs for private sector workers and 15 of them auto-IRA program states.
Digital disruptors
The state-based plans have also created openings and opportunity for a new wave of digital disruptors, including 401GO, a Salt Lake City, Utah-based fintech that provides a comprehensive retirement solution for small businesses and financial advisors with automation technology.
“The states are having to set these up just because quite frankly nobody stepped up.”
401GO CEO Dan Beck
“The states are having to set these up just because quite frankly nobody stepped up,” said 401GO CEO Dan Beck, confirming that the mandates do indeed spark interest among small employers in setting up a plan instead of defaulting to the state plan. “Every time a new state makes an announcement I get another set of wings—let’s say that.”
He said the industry has not been in a hurry to help small businesses for a variety of reasons, including the fact that corporate America provided enough bigger clients where advisors tend to devote the bulk of their time and efforts.
“It took just as much time to set up a thousand-person plan as it does a 10-person plan, so where’s the advisor going to focus their attention? Now we can make it easy to set up a plan regardless of size. Then they no longer need to focus on where they’re going to see the biggest return on investment. We’ve kind of leveled the playing field there,” Beck said.
He saw there was an opportunity to help close the coverage gap by combining automation with the advisor touch.
“I know that a lot of business at the end of the day is done face-to-face with the handshake and really you’re also going to have the best participant outcomes when you can combine both tech as well as the advisor who can walk in and to a small business and say, ‘Hey Brian I noticed you’re not signed up. Is there reason for that?’”
He wanted to build a solution where an employer in as little as 15 minutes can have signed plan documents that connect their payroll so the ongoing administration is all taken care of—and it’s working. The company was recently honored with over 20 awards in the small and micro plans segments from NAPA, who asked advisors to rate the nation’s best recordkeepers.
“It’s about providing the tools to get more people in to service this growing demand that’s about to smack us in the face, as well as getting those who are currently serving the market to be able to move down market and serve 10 times as many people,” Beck said.
Recently, the Pew Charitable Trusts surveyed 1,600 small and midsize businesses to find out why some employers offer a retirement plan while others do not. The top reasons employers refrain from offering a plan? 37% say it’s too expensive to set up, and 22% say they don’t have the resources.
Access to workplace retirement plans for small business is the defined contribution industry’s biggest challenge—and opportunity. The while legacy business models and technology are not designed to address the problems, new incentives from SECURE 2.0 and other legislation, state mandates and digital disruptors like 401GO provide optimism that the coverage gap may finally be bridged.
SEE ALSO:
• Controversial ‘Retirement Savings for Americans Act’ Reintroduced in Congress
• State-Mandated IRAs Not Crowding Out Private 401(k)s: Pew Research