Hyper-connectivity is transforming the world of work. By 2022, 29 billion digital devices will connect people, organizations, and objects in new ways. Already, we are seeing changes in the ways business is done. During the past decade, the “gig” economy, which encompasses independent workers, consumers and the technology platforms that connect workers with consumers, has grown from about 10% of the workforce in 2005 to almost 16% in 2015 and is expected to grow to 43% by 2020.
The sixth annual Freelancing in America study by Upwork and Freelancers Union reported that income from freelancing exceeded $1 trillion.
That’s about 5% of U.S. GDP. Freelancers make a larger contribution to the U.S. economy than the construction industry, and almost match the contributions of other industries. In some ways, freelance work has improved financial security for workers. The report explained:
“…although one employer can reduce the volatility of income while employed, losing that single job has a much larger impact. This is why more than half of freelancers report that ‘having a diversified portfolio of income from multiple clients is more secure than having one employer.’ Similarly, unlike those with a single employer, freelancers have the option to work more by finding additional clients, which can reduce financial stress by helping to offset unforeseen expenses.”
In others, it has created more financial insecurity. In general, the 29% of Baby Boomers, 31% of Generation X, 40% of Millennials and 53% of Generation Z that work independently have little access to benefits of any kind. Since the gig economy—and the number of workers doing full-time freelance work—is growing, innovation is needed to help improve retirement security for independent workers.
This is likely to be quite a challenge. Most efforts to improve retirement security focus on improving access to workplace plans. It makes sense since Americans are 15 times more likely to save for retirement in payroll deduction savings plans through work.
However, these improvements don’t move the needle for independent workers. The retirement industry needs innovative solutions that can help meet the needs of a rapidly growing segment of our economy. It’s unclear what these solutions will be, but they might include:
Expanding 401k eligibility
401k plans are powerful tools that help millions of Americans save for retirement. Typically, plan eligibility is established by age and service requirements. The maximum permissible service requirement is 1,000 hours in a 12-month period. Plan sponsors could consider lowering the number of hours required. This would expand eligibility and give more workers access to workplace plans.
One piece of legislation that may provide a path forward is the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which was passed into law as part of the Further Consolidated Appropriations Act of 2020. The SECURE Act includes a dual eligibility provision that makes defined contribution plans more accessible to part-time employees. Perhaps in the future, a creative solution could be presented to allow contract workers or freelancers access.
Introducing voluntary IRA-based savings plans
Any employer can offer a payroll-deducted IRA program to its employees. The option requires limited employer time and could possibly include freelance workers. It works like this: an employee opens a traditional or Roth IRA, and the employer contributes a specific portion of each paycheck to the IRA upon request. Administration would be fairly straightforward, and there is no employer contribution. A handful of states already require employers to automatically enroll employees in state-sponsored IRA programs if they don’t offer any type of plan.
Technology platforms that connect independent workers and consumers, such as Uber, often take receipt of payment and then distribute it to the worker. Could these companies add pay-deduction IRA plans and direct a portion of freelancers’ pay to IRAs, on request?
Educating workers on individual retirement savings solutions
For decades, Americans have been able to save for retirement outside of work in IRAs and other individual retirement savings plans. While contribution limits for traditional IRAs are low relative to workplace plan limits, individual 401ks offer higher contribution limits. Financial advisors could provide information to freelancers and part-time workers to educate them about the retirement savings opportunities outside of work.
There are other possibilities, too. The Department of Labor’s final regulation for Multiple Employer Plans (MEPs) potentially makes qualified plans accessible to groups of independent workers and freelancers who have common business or economic interests. MEPs are employer plans: each member-employer must have at least one employee who is a plan participant, so a one-person enterprise could potentially participate in a MEP.
As the world continues to adapt to hyper-connectivity and the gig economy grows, helping Americans build retirement security will become more challenging. It’s time to think outside the box.
Effective innovations may involve traditional employer-sponsored plans and they may not. As the workplace evolves, the retirement industry must remain resilient and open to new ideas.
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.
