Nearly half of U.S. workers do not have access to a workplace retirement plan, making them financially vulnerable in their later years.
With the lack of universal coverage affecting millions of Americans, there have been numerous federal government attempts to increase access to workplace savings arrangements. The latest trend is to compel employers to offer a retirement plan to their workers.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was the first substantial law passed in years to address the coverage gap. SECURE 1.0 included a significant expansion of the startup plan tax credit and cleared the way for pooled employer plans (PEPs), in the hope that they would turn out to be attractive to small-business employers.
Another proposed retirement law, dubbed the SECURE Act 2.0, was introduced in late 2020 and is currently making its way through Congress. It would expand on the approach taken in SECURE 1.0 with a further expansion of the startup plan tax credit as well as changes to reduce plan administrative costs.
Earlier this year, the House Ways and Means Committee cleared the Build Back Better Act (BBBA): a proposal that would require U.S. companies without retirement plans to automatically enroll workers in IRAs. However, due to competing priorities, that provision has been dropped from the most recent version of the bill. Still, strong support for such a measure suggests the trend toward universal retirement plans will continue.
While waiting for Congress to act, several states have taken the lead and have started IRA-type programs that require employers without retirement plans to offer one for their workers.
More than a dozen states have enacted programs, and many more states are considering or implementing them. Programs in California, Illinois and Oregon are up and running, with Maryland next to begin implementing its automatic workplace retirement program, starting in summer 2022.
Most recently, New York changed its Secure Choice Savings program from the voluntary (not-yet implemented) version passed in 2018 to a mandatory program. The timeline for New York’s program to get underway is still to be decided but is similar to the Maryland program: Employers with at least 10 employees will be required to offer a traditional retirement plan for their employees or use New York’s new Secure Choice plan, an automatic enrollment payroll deduction IRA retirement savings program.
These state mandates are a great opportunity to start a conversation with your small-business clients. Some state plans are complex, have restrictions and may provide little choice when it comes to investment options. As a result of these concerns, some of your clients may want to take a more active role by considering a traditional retirement plan.
For the financial professional who wishes to stand out, there is an opportunity to start a dialogue with clients and understand any specific pain points or concerns they may have with a state-run plan. Some alternatives to state-run plans include Simplified Employee Pension IRAs (SEP IRA), Savings Incentive Match Plan for Employees IRAs (SIMPLE IRA or Simple IRA Plus) or traditional 401(k) plans. These alternatives can provide greater customization and the ability to select quality investments that may drive better participant outcomes.
Saving for retirement is not unique to American workers. Governments around the world also worry about their citizens’ retirement security. In fact, according to data from the Organisation for Economic Co-operation and Development (OECD), more than 30 OECD and non-OECD reporting jurisdictions have pension plans requiring mandatory or quasi-mandatory participation.
Retirement plan participation is high in most countries with mandatory plans
As a percentage of the working-age population
Several countries, like Australia, New Zealand and the U.K., have enacted compulsory programs requiring both employers and employees to contribute to a retirement savings plan. Employees are automatically enrolled upon employment but have the opportunity to opt out. New Zealand’s KiwiSaver program has gained significant scale since it launched in 2007, growing from 15,000 participants to over 3 million participants at the end of 2020, according to the 2020 KiwiSaver Annual Report. Considering New Zealand’s population of approximately 5 million people, it’s safe to say that the majority of working New Zealanders participate in the program.
Expanded access to workplace retirement plans is needed in the United States and has already taken hold in other countries around the world. It has support from U.S. policymakers, although it may take some time to come to fruition. Universal access is the wave of the future. Financial professionals who prepare in advance of any legislation will be in a better position to help their clients adapt. Consider how potential changes may affect your clients, start conversations with them about their needs and wants and discuss alternatives that may give them more control over their specific plan. That way you can show your value while helping your clients’ employees prepare for a comfortable retirement.
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