A recent report from the Bipartisan Policy Center (BPC) outlined six major challenges for retirement security and personal savings in America, as well as several potential solutions. The first problem that the report identified is that too many Americans currently lack access to workplace retirement saving plans. The authors did acknowledge that defined contribution (DC) plans, such as 401(k)s, can improve participants’ retirement outcomes, and that access to these particular plans has grown over the past few decades as most employers have transitioned away from costlier defined benefit (DB) plans. Moreover, the authors pointed to a study by the Employee Benefit Research Institute (EBRI), which projected that more than half (56 percent) of U.S. workers without access to a DC retirement plan for at least 20 more years will run short of money in retirement, compared to only 12 percent for those that will have ongoing access to a DC plan.
Around three-quarters (74 percent) of surveyed Americans with a workplace retirement saving plan or an Individual Retirement Arrangement (IRA) said that they feel “very or somewhat” confident that they will have enough money to live comfortably in retirement. Only 39 percent of respondents without such a plan reported being similarly optimistic about their old-age finances. However, the BPC researchers stressed that even though two-thirds of private-sector workers in the United States now have access to some sort of employer-sponsored retirement plan, this workplace benefit is still unavailable to tens of millions of employed Americans. It is true that people who lack access to workplace-provided DC plans can open an IRA but few ever elect to do so. What is worse is that participation is nowhere near 100 percent among the workers who do have access to a DC retirement plan through their employer.
With such statistics, it should not be too surprising that a growing number of states are starting to mandate employer-provided retirement plan access. In fact, a more extreme proposal was announced just last month that would require, at the federal level, employers with 10 or more workers to open individualized retirement accounts for every employee, if they do not already offer a retirement plan, and to also make regular contributions to such plans. Plan administration in general, though, can be an onerous task, and many employers simply do not want to deal with the extra red tape and increased costs that they believe sponsoring such a plan may entail. This is one of the main reasons why many employers, especially smaller firms, do not provide all of their workers with access to some sort of retirement benefit.
As a result, the BPC authors recommended “Retirement Security Plans” (RSPs) as a possible solution to the challenge of limited access to workplace retirement saving plans. RSPs would work like Multiple Employer Plans (MEPs), in that they enable employers to “band together” and utilize centralized plan administration and economies of scale to offer workers well-designed retirement options at a lower-cost than would likely be available alone. Retirement Security Plans, though, would differ from standard MEPs in a few key ways, e.g. getting rid of the requirement that employers share an industry nexus or commonality. More details can be found on pages 39-41 of the report, and we will explore some of the other challenges and potential solutions outlined by the Bipartisan Policy Center in subsequent parts of this series.
Sources: Bipartisan Policy Center, Employee Benefit Research Institute, U.S. DoL, Vanguard, NAPAPost author: Charles Couch