More than half of the 55 million Americans who are not offered a retirement plan through their employers work for small businesses. While some see this longstanding coverage gap among small firms as an unsolvable problem, others see a market opportunity. This is the third blog post in a series that will feature perspectives from entrepreneurs and intrapreneurs in both the for-profit and non-profit sectors who are using technology and other innovations to reach this hard-to-serve population. We hope that the resulting insights will help other market players and federal and state policymakers better understand what it will take to achieve a truly universal retirement savings system in the US.
For the past decade, conversations about lack of retirement savings have focused on the shift from defined benefit to defined contribution plans and the cascading consequences that have emerged from this shift. Despite how disruptive this shift has been for working Americans, one element has remained constant: Many employers continue to sponsor retirement savings plans for their employees. When designed properly, these plans are highly effective and help millions of people.
But what happens when your employer does not offer a retirement plan or what if you are not a traditional employee?
Roughly half of the American workforce — 55 million people — don’t have access to any kind of employer-sponsored retirement plan. Lack of plan coverage (and the resulting low levels of retirement savings) is quickly becoming one of the most pressing social challenges of our generation.
The Uncovered Workforce
Uncovered workers fall into two main categories:
1.) Full time employees working for employers that do not offer plans
According to the Government Accountability Office, only 14 percent of small employers with fewer than 100 employees offer a plan. In 2017, Pew released the results from a study conducted with small businesses designed to better understand the barriers to, and motivations for, offering retirement plans. The top three “main reasons” employers do not offer retirement plans are the plans are too expensive to set up (37 percent); the employers lack the internal resources to offer a plan (22 percent); and employees are not interested (17 percent).
2.) Independent contractors and “gig workers” who do not have a traditional employer
Over the past five years, there has been a strong trend toward non-employer working arrangements such as independent contractors, freelancers, and consultants. It is estimated that by 2020 as many as 40 percent of American workers will not have an employer. While this may seem surprising, a recent report by researchers from Harvard and Princeton concluded that “all net employment growth in the past decade came from alternative work arrangements, not full time jobs.”
Self-Directed Retirement Planning Is Too High a Barrier
In the absence of an employer to facilitate and promote retirement savings, the burden to design a retirement savings plan is fully on the shoulders of the worker. Without a structured savings environment (similar to an employer-sponsored savings plan with auto-features, vetted funds, and financial education), people are much less likely to save. The average person does not have the training or skills required to successfully plan, set up, and manage a retirement savings strategy over a 40-year timeframe.
Compounding these issues are deleteriously low levels of trust in financial institutions. Only 12 percent of respondents to the National Association of Retirement Plan Participants (NARPP) April 2016 Participant Trust and Engagement Study said that they “just about always trust financial institutions.” It is understandable then that very few uncovered workers set aside money in an Individual Retirement Account (IRA) or other retirement savings vehicles.
A New Model for Structured Retirement Savings Plans
As the labor markets shift to non-traditional employment, there needs to be a parallel shift in how we think about delivering retirement plans.
What’s needed is a radically new kind of retirement savings experience—one that is independent of employment status, portable, sustainable, effective, and is designed to meet the needs of individual savers.
In 2016, NARPP began a process of formulating such a solution. We convened an advisory group of industry stakeholders, academics, policy experts, and user-experience designers to help develop a new way to save for retirement.
The result of this collaboration is a Universal Retirement Plan, called Icon. To the extent possible, Icon leverages the aspects of an employer-sponsored plan yet simultaneously removes the dependency on an employer to access the plan. And because NARPP is a non-profit, dedicated to helping people save we are uniquely situated to fill the role of “mentor.”
Icon features:
- Fiduciary oversight is provided by an investment committee of industry experts.
- No hidden fees, conflicts of interest or commissions
- Low institutional pricing on funds
- Auto default features
- Behaviorally effective education and information designed to nudge people at the right time
- State of the art technology to reduce friction points in savings
- Portability
Icon fills the enormous gap that exists between employer-sponsored savings plans on one end, and complete do-it-yourself plans on the other. It will be available to small employers who do not currently offer a plan, large employers who have workers that are not eligible to join their 401(k) plan (like part-time employees and independent contractors), companies that serve as platforms for contract workers, and independent contractors and freelancers.
Continuing to rely on employers to be the primary sponsor of retirement savings plans is not a realistic or feasible solution. The number of employers offering plans has declined and we must develop new models as viable alternatives to the traditional employer/employee model. We built Icon to thrive in just this type of environment, and are currently building partnerships with large gig worker platforms, small business affiliations, employment agencies, and e-commerce platforms.
Without access to structured, efficient, and saver-centric retirement savings plans, uncovered workers and their families are facing a bleak financial future.
Icon demonstrates how innovative partnerships between innovative companies, thought leaders, and non-profits, can create socially innovative breakthrough ideas and solutions.
Laurie Rowley is the co-founder and president of the National Association of Retirement Plan Participants (NARPP), the only non-profit 501(c)(3) dedicated to the 145 million working Americans saving for retirement. The views and opinions of the author are her own and do not necessarily reflect the view of the Aspen Institute Financial Security Program or its funders.
