The retirement savings gap was recently quantified according to a report from the Pew Charitable Trusts in January 2016. There were many important findings that were discovered in this report, from consumer confidence in their ability to retire to the lack of access of retirement plans for hard-working Americans.
With regards to consumer confidence surrounding retirement readiness, the study revealed that 60% of Americans are either just somewhat confident or not confident at all in their ability to retire comfortably, with only 22% of Americans feeling very confident that they will be able to retire comfortably.
Shifting our focus to retirement plan access, the study divulged that nearly half of all Americans participate in a workplace retirement plan. What makes this statistic so staggering is that only 58% of Americans actually have access to a workplace retirement savings benefit with only 49% of the 58% taking advantage of these programs. In terms of real numbers, this represents 30 million full-time working Americans between the ages of 18-64 that lack access to a retirement plan at work. (For related reading, see: Job Hunting: Higher Pay vs. Better Benefits.)
Barriers to Access to Retirement Plans
When the topic of workplace retirement plans is discussed, we tend to think of a common tool, the 401(k) plan. According to the IRS guidelines for 2017, elective deferrals for 401(k) plans remain unchanged at $18,000. The overall limitation for defined contribution plans increased from $53,000 to $54,000. The catch-up contribution for employees 50 or older remains at $6,000 thus increasing the limits to $24,000 and $60,000 respectively for these employees.
While there are many reasons why 401(k) plans are advantageous for employees, they are often onerous to administer and expensive for employers to install and maintain over their lifetime, at least until the assets grow. Additionally, there are fiduciary responsibilities under ERISA that the plan sponsor must fulfill to maintain proper plan compliance. (For related reading, see: 401(k) and Qualified Plans.)
Alternative Retirement Savings Methods
Several other retirement plan choices that are often overlooked but should be considered in addressing the retirement savings gap include: SIMPLE IRAs (Savings Incentive Match Plan for Employees of Small Employers Individual Retirement Accounts), payroll deduction IRAs (Individual Retirement Accounts), and SEPs (Simplified Employee Pension Plans).
For our purposes, we will focus on SIMPLE IRAs. According to the IRS and Department of Labor Publication 4334 (Rev. 10-2014), SIMPLE IRAs serve as a comparable alternative when an employer meets two basic criteria: 1) less than 100 employees earning $5,000 or more, and 2) another retirement plan cannot also be offered in addition to the SIMPLE IRA. (For related reading, see: SIMPLE IRAs: Eligibility Requirements.)
Some of the advantages of offering this retirement plan program are as follows:
- Easy to set up and maintain;
- Administrative costs are low especially in comparison with 401(k) plans;
- Employees have the ability to contribute through payroll on a tax-deferred basis;
- Employer contributions are in the form of a match typically of 3% or a fixed non-elective contribution of 2% for each eligible employee regardless of the employee's deferral; and
- Generally no filing requirements and employers do not need to file an annual Form 5500 return as they would with a 401(k) plan.
Some of the disadvantages of offering this retirement plan tool include:
- A penalty of 25% for taking out money prior to age 59.5 within the first two years from when the employer initially deposits contributions into your account;
- The employee contribution levels are less than a 401(k) plan: $12,500 with an extra $3,000 catch-up contribution for employees over the age of 50.
Key Takeaways for Retirement Savers
There is no doubt our country is facing a retirement savings gap. This gap could partially be attributed to the lack of employer-sponsored retirement plans for their employees. Employers may be concerned with the costs and filing requirements of 401(k) plans.
As we discussed there are retirement programs, such as the SIMPLE IRA, that employers can offer their employees which would be less cumbersome to administer and less expensive to maintain. If we as a country are going to solve for the retirement savings gap that exists, we will need to collectively do a better job of addressing retirement plan access in the workplace by offering alternative programs to the 401(k) plan so that everyone has an opportunity to retire with dignity. (For more from this author, see: The Impact of Student Debt on Retirement Savings.)
Investment advice offered through Summit Group Retirement Planners, Inc., a Registered Investment Advisor. Summit Group Retirement Planners. This information is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.