A significant number of working Americans don’t have access to a retirement plan at work – this week we asked NAPA Net readers how they would close the so-called coverage gap, and how they’d get more employers offering a program.
There’s some debate over just how many working Americans don’t have access to a retirement plan at work – “more than half” is the number that the uninformed bandy about, but even the arguably more precise estimates indicate that it’s a significant number.
One issue that isn’t much disputed – is that when workers have access to a plan at work, they are much more likely to save – 12 times more likely, in fact.
No Plan Rationales
But, as for closing that gap, we started by asking readers the reason(s) they have heard plan sponsors give for not offering a workplace retirement plan – we allowed for more than one response (because, after all, different employers might have different reasons, and even a single employer might have more than one reason), but there was a predominant response – cost, cited by 88% of this week’s respondents. Other reasons cited were:
48% - workers aren’t interested
42% - fiduciary liability
39% - lack of time
27% - don’t know how
Other criteria cited were testing administration headaches, not enough revenue to justify, not enough benefit for the owners, and a lack of staff.
That said, one reader noted, “Never met a company who didn't consider a retirement plan to be a must have.’ Have I led a sheltered life?”
Not surprisingly, in view of those results, asked to narrow it down to a single reason, cost still topped the list (53%), with “don’t know how” and lack of time drawing 15% each, and fiduciary liability and workers aren’t interested splitting the remainder.
“I think that many plan sponsors think they need to research the market themselves and feel overwhelmed,” noted one reader. “If I can work with them to understand they can hire me to do the research, including robo options, they are more likely to look. If they do it is another thing. We should have automatic installation for plan sponsors!”
Another explained, “I don’t think there is a reason for any employer not to offer a 401(k) to employees. This is something that I believe in the future if we consider the importance of retirement savings will eventually become something government mandated and at that point it would be better to offer a private retirement plan with better investments than a mainstream gov’t run plan.”
Encouraging Plans
Turning to the issue of closing the coverage gap, we asked readers to weigh in on way(s) that could encourage plan formation, and thus – close the aforementioned coverage gap. More than one response was permitted, and, ranked in order:
73% - offset cost with tax credits
61% - safe harbor provisions to provide relief from fiduciary liability concerns
48% - eliminate and/or loosen current nondiscrimination requirements
33% - eliminate top-heavy testing requirements
27% - make employers offer plans
24% - promote workplace plan options through marketplace availability
12% - incentivize advisors to promote the availability/nee for plans
12% - encourage formation of more state-run programs for private sector employees
9% - establish a mandatory federal auto-IRA alternative
6% - establish a federal auto-IRA alternative
Other suggestions were to change the laws so the administration of plans is not so complicated, to “create efficiencies and cost savings through Open MEPS (multiple employer plans), and to amend SIMPLE IRAs to be more attractive, with features such as auto-enrollment, Roth contributions, higher limits.”
“I say this with mixed feelings... perhaps make the fiduciary requirements a bit less onerous,” noted one reader.
“I checked ’em all,” explained another reader, who went on to note that, “They all COULD help. Most actually would, but that doesn’t mean they are good ideas.”
“I would be interested to see who is not offering plans because I think that would be the most telling,” said another. “I am in the SF Bay Area where we have lot of small start up companies with little time to devote to employee benefits hence we have many Robo 401k companies starting that gives these companies a way they can provide a plan while minimizing cost and time. Long term these plans are not great but for the short term if offers their employees and option. I think that type of company serves a good purpose. I would prefer not to see state run programs or federal mandates.”
“I think if you loosen the restrictions on Top Heavy and ADP testing you would see more 401(k) plans in the market place,” commented another. “Right now if an employer wants to offer a plan so that both he and his employees can save for retirement he is forced to now be concerned with the fact that if his employees could care less about saving he must give them something so that he can protect his own future. If they removed these requirements you would see a greater number for 401(k) plans and I guarantee you would see even more companies matching because they could do it at their own discretion.”
Dear Congress…
Those sentiments notwithstanding, we next told readers to imagine that they had been asked to provide a recommendation to Congress as to a viable means of closing the coverage gap – and asked them which one they would recommend.
The “winner.” though by a narrow margin – was “Eliminate and/or loosen current nondiscrimination requirements,” which drew the support of 23%, followed closely by “offset cost with tax credits,” cited by 19%. Other recommendations included:
16% - safe harbor provisions to provide relief from fiduciary liability concerns
13% - make employers offer plans
6% - encourage the formation of more state-run programs for private employers
3% - establish a mandatory federal auto-IRA alternative
Other suggestions included; extra tax benefits if using automatic enrollment/auto escalation, to expand open MEPs, and to eliminate/loosen nondiscrimination requirements for small businesses in particular.
“While there are some good options above for increasing coverage,” noted one, “the only way to come close to getting everyone access to a workplace plan is to require that employers offer a plan.”
Another opined that, “the 1975 DOL IRA safe-harbor and DOL Interpretative Bulletin 29 CFR 2509.99-1 make it clear that the state run programs which Oregon, California, Illinois, Maryland and Connecticut have enacted are not subject to ERISA and that the fiduciary responsibility is on the state. These programs are the easiest way to extend coverage to the millions of Americans who do not have coverage. Congress should let the states handle this issue and not try to come up with a Federal solution which will take years to accomplish.”
‘Power’ Steering
It's one thing to offer an opinion to legislators – but we also asked readers what they would do if they were given the power (and the opportunity) to close the retirement plan coverage gap – but could only choose one thing:
26% - eliminate and/or loosen current nondiscrimination requirements
16% - safe harbor provisions to provide relief from fiduciary liability concerns
13% - offset cost with tax credits
13% - make employers offer plans
10% - encourage the formation of more state-run programs for private employers
5% - establish a federal auto-IRA alternative
3% - establish a mandatory federal auto-IRA alternative
Other Comments
There were, as you might expect, a number of reader comments. Here’s a sampling:
“It all boils down to compliance and requirements. I guarantee all employers would not mind having a 401(k) plan but when you then discuss the Top Heavy and ADP/ACP testing requirements it really throws a company off. If you speak with an employer who wants to offer a 401(k) but let’s say can only match 2% not 3% or 4% safe harbor options. They will now be deterred from offering the plan because of the difference in match offerings. There is also a big emphasis from employees that unless a plan matches they will not contribute. So they end up contributing to an IRA instead of the 401(k) since they don't see the benefit in the 401(k) vs IRA since most will probably not end up contributing the max amount. What could be done is if you are covered under an employer plan IRA contributions are no deductible there for driving people in the 401(k) plans. If you do that and eliminated plan testing. You will see a major shrinkage of the coverage gap.”
“Things that I know for sure is, I do not want companies forced to offer a plan or to get the state or federal government involved in the retirement plan business. I also think that a plan sponsor, administrator and advisor SHOULD be fiduciaries. Nondiscrimination and top heavy testing keep all of us honest and we can also use safe harbor provisions so you have three options left and tax credit or tax benefits the most impacting.”
“The only reasons I’ve heard are high administrative fees, high contribution costs, and time required by owner. Eliminate any of these and you'll probably see more plans. Comment 2: I’m tired of hearing about the coverage gap with respect to workplace retirement plans. All employees have access to a retirement plan. They're called IRAs. The only people I want to hear from are those maxing out their IRAs and looking to contribute more. Until you're contributing the full $5,500 to an IRA, you have no coverage gap. Yeah, yeah, people save more in a workplace plan, blah, blah, blah. That's on the employee, not on the employer or government. Why are employers responsible for so much, like health insurance and retirement savings? Employers should be able to focus on making widgets. Any regulations should pertain solely to the making of widgets and the environment in which to do so.”
“It was difficult choosing just one option to changing things. We run into that people are scared to offer one and don't know that anyone will put money away so they fear the non-discrimination area. They also are very fearful of their own liability in the plan.”
“There are two parts to the ‘it costs too much’ argument: admin costs (which is able to be pushed back on participants) and then the cost to get it to pass testing. IMHO, we can’t do much about the admin side, except to better set expectations about benchmarks for where your business is when you need a plan and that a plan isn’t going to cost less than $3-5k to install. If we could loosen up the discrimination testing (let it go in the first 2 years of the plan, for example), that would help forgo the ‘but you might get a refund unless you do safe harbor’ conversations until the plan is established with a track record of who participates. Another option could be tax credits to offset whatever the match amount is (up to a point within reason) for the two years of the plan.”
“I work primarily with small employers, less than 50 employees. I have found their accountants are reluctant to advise these employers to start plans because of the financial commitment and will often recommend a SIMPLE IRA despite the restrictions. When it is appropriate, if I can get in front the employer, I can show the superiority of a 401(k) over a SIMPLE and how it is worth the additional expense to administer.”
“A voluntary retirement system will never get close to full coverage for employer plans. I don't see government run ‘solutions’ as a good option. As much as I dislike the idea of mandates, the only way to get close to everyone having a workplace plan available is to require employers to sponsor a plan.”
“The requirements to sponsor a plan is overwhelming to most small businesses; too much risk, too many rules, too much reporting and notices... and yes, cost in terms of time and money... knowing what I know, I would not sponsor a plan either...”
“Failing to plan is planning to fail. There has to be a plan for retirement or there won't be any retirement. Not one you’d want, anyway.”
“Everyone has options available to them – if you’re in the gap, you choose to be. If you’re a gig worker, you can set up your own plan or contribute to an IRA. If you’re making minimum wage and not eligible for your employer’s plan, go to an IRA. If you’re working for an employer without a plan, you could: a) talk to them about it; b) put money into an IRA; or c) find another employer. The government doesn’t have to be involved further!”
“‘I don’t have time’ really means ‘It's not a priority.’ To be fair, I think it’s difficult to make something a priority if it seems daunting or hard to understand. As a result, smaller employers won't make it a priority until their employees make them. If the economy continues to improve, employers may find they need to offer retirement plans to stay (or become) competitive. Then, suddenly, they will find the time.”
“Tax credits to offset costs will also be important to ease the plan sponsor burden.”
“Some employers simply don’t care enough about their employees to make the effort/investment.”
“A f/t employee I work with at my p/t job (a large employer) asked me who she can save for retirement. We are only eligible for the company’s DB plan, as the 401k plan is not open to union employees. The idea of a state run program for those people who don’t have access to retirement plans would give those people the opportunity to save when none is currently open to them (except IRAs).”
“We also know that the so-called coverage ‘gap’ is predominantly found among smaller employers, and among workers whose ties to the workforce are less ‘solid’ – part-time, part-year, and others beyond ERISA’s reach (too- young, or too old). And there are even those who are self-employed who simply haven’t gotten around to setting up their own retirement plan.”
Thanks to everyone who participated in this – and every – week’s NAPA Net Reader Poll!
