Last week we looked at a few studies which highlighted Americans’ general lack of retirement confidence. Such findings are not too surprising given that many pre-retirees are not taking the necessary steps to ensure a comfortable and financially secure lifestyle in old age. For example, 41 percent of U.S. adults recently surveyed by TIAA reported that they are setting aside only 10 percent or less of their income each year for retirement, and an alarming 28 percent said that they currently are not saving anything for retirement. One likely factor contributing to the widespread saving inadequacy is a lack of information because nearly two-thirds (65 percent) of respondents said that they have no idea how much monthly income they will have to live on in retirement.
Similarly, not even half (45 percent) of Americans surveyed by Ernst & Young this month said that they made an effort in the past year to calculate how much money they will need to save in order to achieve their ideal retirement outcome. In fact, more than a third (37 percent) of respondents over the age of 50 reported that they have never made any attempt to estimate their old-age financial needs. Moreover, the single biggest financial regret for U.S. workers recently surveyed by American Century was “not saving enough for retirement,” and nine in 10 respondents said that they wish they could go back in time and “tell their younger selves to save more.” One way to avoid these regrets is to participate in an employer-sponsored 401(k).
Indeed, there are various tax advantages associated with these plans, and many sponsors will match at least some portion of participants’ contributions. Further, a growing number of employers are incorporating automatic-enrollment and auto-escalation into their 401(k) plan design in order to make sure that their workers start saving early for retirement and boost the rate of saving over time to a more adequate level. However, not all businesses provide their workers with access to a 401(k) retirement plan. Just look at the Employee Benefit Research Institute (EBRI) study which estimated that only 36 percent of U.S. workers at companies with 50 to 99 employees in 2013 had access to some type of retirement plan sponsored by their employer. That dropped to just 13 percent for the smallest of businesses with fewer than 10 workers.
In many cases these smaller firms avoid offering such benefits because the cost of doing so is believed to be too great. Failing to provide access to a 401(k) not only limits workers’ available tools for financially preparing for retirement but also reduces an employer’s ability to compete for talent with larger firms. This is evidenced by a Towers Watson survey which found that nearly half (45 percent) of employees cited retirement benefits as an “important” reason to stay with their current employer. More than a quarter (29 percent) of employee respondents also stated that retirement benefits are an important reason for choosing to work for an employer in the first place.
Fortunately, the are several options that can enable more small businesses to offer attractive retirement benefits to their workers. Multiple employer plans (MEPs), for instance, allow two or more employers to participate in employee benefit plans that are maintained as a single plan. This pooling of plan assets can lead to a significant reduction in the barriers to entry (costs) associated with a high quality defined contribution (DC) plan, and lower administrative burdens and reduced fiduciary responsibilities are possible as well. More information on the advantages of MEPs can be found here, and additional help is available by working with a professional employer organization (PEO).
Some policymakers in Washington D.C. are also trying to help small businesses set up retirement programs for workers. For example, the Small Business Employee Retirement Savings Act, introduced this month by Senators Richard Burr (R-N.C.) and Michael Bennet (D-Colo.), would increase the retirement startup tax credit from $500 to $5,000. This proposal would also try to incentivize auto-enrollment by creating a new $500 per year tax credit (up to three years) for small businesses that offer new retirement plans that include this feature. Firms that add auto-enrollment to an existing retirement plan could also take advantage of the tax credit. Further, this bill seeks to eliminate the 10 percent auto-escalation limit in order to allow employees to make larger contributions to their retirement accounts.
Sources: TIAA, Ernst & Young, American Century, NAPA, EBRI, Towers Watson, NAPEOPost author: Charles Couch