While the vast majority of Americans who save for retirement do so through a 401(k) or similar plan provided by their employer, additional types of saving plans may be needed to help the millions of workers who are not adequately saving in workplace plans build a financially secure retirement, according to an article published on March 14 by The Pew Charitable Trusts.

The article, “3 Ways People May Save for Retirement in the Future,” was written by John Scott, director of Pew’s retirement savings project. Scott observed that “we may have reached the limit of what our employer-sponsored system can do to support a secure retirement,” as currently only about half of private sector businesses offer retirement benefits, and even though around 140 million people participate in retirement plans, the proportion of the employed workforce covered by these plans has never exceeded 70%.

Scott argued that while Congress could increase incentives to encourage more employers to sponsor plans, he noted that previous research has shown that small employers are often reluctant to offer retirement benefits because of the plan startup costs and administrative burdens, and that it is not clear that offering them a new tax break would overcome these concerns.

Given that is unlikely that many more employers will start voluntarily offering retirement benefits or that many more employees will start saving on their own, Scott said, new approaches that build on the elements that are known to work in the current system should be considered. Specifically, he recommended the development of 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 that gives employers the option to add to those accounts through a matching contribution.

While acknowledging that no current initiative fully captures these ideas, Scott noted that recent actions at the state and Federal levels point to the outlines of a system that could cover more workers, without relying solely on individual employers to sponsor their own retirement plan.

Among these initiatives, Scott said, are state-level retirement savings programs for employees without a workplace plan. He reported that California, Connecticut, Illinois, Maryland, and Oregon are implementing programs in which workers are automatically enrolled at a default rate of contribution, typically around 5% of pay, and with the ability to opt out at any time. In these programs, employers facilitate worker contributions through their payroll systems, but otherwise are not involved.

Scott also mentioned that a new approach may come from Congress, as the Retirement Security Act, which would allow any group of employers to share plan costs in group plans known as multiple employer plans, or MEPs, was recently introduced in the Senate. He observed that these plans could be especially helpful to smaller employers wary of the administrative costs of offering a stand-alone plan.

Finally, Scott pointed out that there are more than 10 million independent or contingent workers in the U.S. who have very low rates of retirement benefit coverage. To help these workers save in a changing economy, he recommended the development of retirement savings models that expand coverage options, possibly using new entities affiliated with associations, unions, or industry sectors

From Benefit Trends Newsletter, Volume 62, Issue 4

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