The vast majority of Americans who save for retirement do so through a plan provided by their employer — typically a 401(k). But we may have reached the limit of what our employer-sponsored system can do to support a secure retirement. Today, only about half of private sector businesses offer retirement benefits. And while about 140 million people participate in retirement plans, the proportion of the employed workforce covered by these plans has never gone above 70 percent.
Congress could increase incentives to encourage more employers to sponsor plans, but offering retirement benefits is a voluntary decision by employers who are juggling many priorities and demands. Research by The Pew Charitable Trusts shows that small employers, the least likely to offer retirement benefits, are put off by both plan startup costs and administrative burdens, and it’s not clear a new tax break would overcome these concerns.
In fact, the voluntary nature of the current system and current workforce trends raise the possibility, however undesirable, that existing plan sponsors could stop offering or reduce retirement benefits in large numbers. While no research indicates that employers intend to completely end plan sponsorship, the past 30 years has seen an ongoing shift as they have moved away from offering certain benefits such as traditional pensions and indemnity health insurance plans. The 401(k) plan is generally less expensive to run than a traditional pension, but small plan sponsors typically face plan operating expenses that are, as a percentage of assets, 2 or 3 times higher than costs borne by large plans.
Of course, people without a workplace-based plan could still save for retirement on their own, but less than 15 percent of all American households contribute to an individual retirement account outside of work.
So, if we can’t count on more employers to voluntarily offer retirement benefits or on employees to save on their own, what can we do to help American workers build a financially secure retirement?
Any new approach should incorporate what we know works in the current system. For example, without sponsoring a plan, employers can facilitate payroll contributions and serve as a conduit for financial information. And the practice of automatically enrolling workers into a retirement savings program — with the ability to opt out — has greatly increased participation.
While not possible under current federal law, one could imagine a low-cost, portable, individual-based system, managed by a third party, that allows workers to automatically contribute to their own retirement account with each paycheck and give employers the option to add to those accounts through a matching contribution. No current initiative fully captures these ideas, but recent actions at the state and federal levels point to a system that could cover more people without relying solely on individual employers to sponsor their own retirement plan.
One of these initiatives is a state-level retirement savings program for employees without a workplace plan. California, Connecticut, Illinois, Maryland and Oregon are implementing programs, in which workers are automatically enrolled at a default rate of contribution — typically around 5 percent of pay — with the ability to opt out at any time. Employers facilitate worker contributions through their payroll systems but otherwise are not involved. Since Oregon rolled out the first of these efforts — called OregonSaves — in 2017, 62,888 employees (72 percent of those eligible) across 2,899 employers have enrolled and are saving at an average rate of 5.6 percent of their pay. As the assets grow, the costs of the Oregon program already are falling. In September, State Street Global Advisors, which manages the OregonSaves assets, reduced the fees of underlying investments within its suite of life cycle funds from 13 basis points to 9 basis points as well as the fee of underlying investment within its growth fund from 6 basis points to 2 basis points.
Another new approach may come from Congress, which is considering legislation to expand employers’ ability to share costs in group plans known as multiple employer plans, or MEPs. These could be especially helpful to smaller employers wary of the administrative costs of offering a stand-alone plan. In February of this year, Senators Susan Collins (R-ME) and Maggie Hassan (D-NH) introduced the Retirement Security Act, which would allow any group of employers to join a common plan.
But what about nontraditional workers struggling to save for retirement in a changing economy? More than 10 million independent or contingent workers, a category that includes consultants, freelancers, and temps, have very low rates of benefits coverage. Alternative retirement savings models that might serve part-time and independent or contingent workers include using new entities affiliated with associations, unions, or industry sectors, such as manufacturing and retail, to expand coverage. For example, The Black Car Fund, a nonprofit organization created by the state of New York, imposes a 2.5 percent surcharge on each for-hire, non-taxi passenger fare to provide wage replacement and medical benefits to 130,000 drivers. A similar approach could fund retirement benefits for other independent workers.
Employers will be crucial stakeholders in the U.S. retirement system for the foreseeable future. Their payroll systems facilitate automatic and regular contributions, many provide substantial matching contributions, and they can provide critical communication, education, and other retirement-related services for their workers. And employers, many of which are committed to providing robust retirement benefits, should continue to have the option of sponsoring their own plans.
But the world of work, and the very nature of the employer-employee relationship, is changing. We need innovative ways to increase access to retirement savings for those who don’t have it, while preserving employer engagement — and plan sponsorship — without requiring employers to be the sole foundation of the system.
A rethink of U.S. retirement policy is overdue. The large number of Americans not saving for retirement, and the limits of a voluntary, employer-based system, demand no less.
John Scott directs The Pew Charitable Trusts’ retirement savings project.