Retirement in America Part II: Americans Lack Savings

Nearly half of Americans age 55 and older have nothing put away for retirement. Seventeen percent of American workers feel very confident in their ability to retire comfortably. Four out of five working Americans have less than one year’s income saved in retirement accounts. In the simplest possible terms, Americans are just plain not saving enough for retirement.

A deeper look belies more than a mere lack of fiscal discipline among the general population. Many factors contribute to this issue, and the fix is not as easy as imploring folks to “buckle down.”

Lack of Access

Almost half of American private sector employees – roughly 55 million people – work for an employer that does not offer a retirement plan. Statistics show that access to a plan through the workplace increases individual savings. Any discussion about solving the retirement crisis has to include expanding access to savings through the workplace.

According to the 2018 Millennium Trust Small Business Retirement Survey, 87% of employees at small businesses that do not offer a savings plan were likely to participate if their employer offered such a program. Seventy-five percent said having access to a workplace saving option would help them better save.

Lack of Employer Awareness

Small businesses are less likely to offer a retirement plan to their employees than their medium or large counterparts, and incorrect assumptions about workplace savings options create stumbling blocks for small businesses that would otherwise be interested in offering a savings benefit to their employees:

• 64% of the small businesses surveyed think their company is too small to offer a retirement savings solution.

• 66% believe offering a retirement program to employees is too expensive.

These misconceptions often stopped the small businesses we surveyed in their tracks as they attempted to research their options, with only 23% responding that they had researched programs other than a 401(k), such as a SEP or SIMPLE IRA.

These numbers point to a problem of options and education, one that transcends finger pointing at private business or government policy. Thankfully, both entities are working diligently on solutions.

Expanded Workplace Savings Solutions

The idea that a business is too small or cannot afford a retirement plan ignores the availability of alternatives to traditional defined contribution plans like a 401(k). As the retirement crisis has come into focus, 28 state governments have explored or implemented retirement plan mandates and marketplaces to increase access for workers in their states.

Seeing these developments, some see alternative plans, like SEP, SIMPLE and Payroll Deducted IRAs, being the next wave of solutions that could help close the coverage gap. These types of IRA-based plans are typically more affordable and less complicated for businesses where a 401(k) might not be a great fit.

State-Run Retirement Plans

To date, five states – California, Illinois, Massachusetts, Oregon and Washington – have put their state-run plans into use. Of these plans, only Washington and Massachusetts do not include a formal state mandate for employers. While still in the nascent stages of their existence, these programs have reported mixed early returns. OregonSaves has shown some early success, with more than 50,000 enrolled employees and $10 million in assets through 2018.

However, these state options face headwinds in the form of public perceptions: 71% of respondents of the 2018 Millennium Trust Small Business Retirement Survey would prefer a private sector financial services company as their retirement plan provider, compared to only15% for state government.

Federal Retirement Legislation

Retirement legislation has been gaining momentum in both the House and the Senate, with a focus on increasing retirement readiness for American workers. In particular is the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which passed in the U.S. House of Representatives earlier this year.

The SECURE Act incorporates many provisions of another proposed bill, the Retirement Enhancement Savings Act (RESA). Among other things, the key provisions in RESA would (1) allow wider use of MEPs; (2) repeal the maximum age for traditional IRA contributions; (3) increase financial incentives for small business to adopt new plans; and (4) remove caps on auto-enrollment and auto-escalation features. RESA has had bi-partisan support for many years.

The SECURE Act effectively incorporates all of the above key provisions of RESA, in some instances with variations, as well as additional provisions designed to increase retirement system participation and savings, including (1) an increase in the RMD age from 70 ½ to 72, and (2) allowing more long-term, part-time workers to participate in 401(k) plans. Ultimately, it seems that the initiatives of the SECURE Act and RESA will need to be reconciled before anything is passed into law.

While none of the aforementioned developments will act as a panacea for the retirement crisis, these initiatives together can go a long way toward increasing access to retirement plans and, in turn, improve retirement readiness for American workers.

Be sure to catch up on Part I of the series, and stay tuned for Part III.

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.