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RETIREMENT PLAN INVESTOR

Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:

IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1, 2 OR 754

Visit americanfunds.com/retire

IF YOUR PLAN ID BEGINS WITH 34 OR 135

Visit myretirement.americanfunds.com

Categories
401(k)
The trend toward universal retirement plans
Jason Bortz
Senior Counsel

Nearly half of U.S. workers do not have access to a workplace retirement plan, making them financially vulnerable in their later years.


This chart shows that out of 124.6 million private sector workers, 57.3 million have no access to a retirement plan at work, or 46%, while 67.3 million do have access to coverage at work. Source: Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions, Inc., 2020. ESI analysis of Census Bureau Current Population Survey and BLS National Compensation Survey Data.

Source: Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions, Inc., 2020. ESI analysis of Census Bureau Current Population Survey and BLS National Compensation Survey Data.

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.


Efforts to make employers improve coverage


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.


States stepping up to close the coverage gap


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.


Universal retirement plans are the norm overseas


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

The first chart in this graphic shows the percentage of people who participate in mandatory or quasi-mandatory retirement plans in countries that have them. Latvia: 100.0%, Sweden PPS: 100.0%, Finland: 93.0%, Denmark ATP: 91.9%, Estonia: 90.6%, Sweden QMO: 90.0%, Netherlands: 88.0%, Hong Kong (China) MPF: 87.8%, Bulgaria: 87.0%, Israel: 85.4%, Iceland: 83.2%, Chile: 83.0%, Costa Rica ROP: 82.9%, Russia: 79.3%, Croatia: 79.2%, Kazakhstan: 77.6%, Switzerland: 77.2%, Australia: 75.2%, Mexico: 70.3%, Uruguay: 65.5%, Denmark QMO: 65.3%, Norway: 61.2%, Romania: 60.6%, Dominican Republic: 55.1%, Colombia: 52.4%, Georgia: 39.1%, North Macedonia: 36.8%, Maldives: 36.7%, Peru: 35.4%, Armenia: 30.7%, Korea: 17.0%, Nigeria CPS: 8.4%, Malawi: 4.5%, Turkey - VASA + Oyak: 1.5%. The second chart shows the percentage of people who participate in auto-enrollment plans in countries that have them. New Zealand: 78.5%, Lithuania: 75.7%, United Kingdom: 49.0%, Turkey: 12.1% and Poland: 6.3%. Source: OECD (2021), Pension Markets in Focus 2021, www.oecd.org/finance/pensionmarketsinfocus.htm. “ATP” refers to the Danish labor market supplementary pension fund. "CPS" = Contributory Pension Scheme. “MPF” = Mandatory provident fund. “PPS” = Premium pension system. "QMO" = Quasi-mandatory. "ROP" refers to a mandatory supplementary pension scheme.

Source: OECD (2021), Pension Markets in Focus 2021, www.oecd.org/finance/pensionmarketsinfocus.htm. "ATP" refers to the Danish labor market supplementary pension fund. "CPS" = Contributory Pension Scheme. "MPF" = Mandatory provident fund. "PPS" = Premium pension system. "QMO" = Quasi-mandatory. "ROP" refers to a mandatory supplementary pension scheme.

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.


This image shows quick facts about New Zealand’s KiwiSaver Program: Available to all New Zealand citizens and permanent residents living or normally living in New Zealand whether employed or not. Workers are automatically enrolled but can opt out. Employee contribution – 3% minimum. Employer match – 3% and a tax credit contribution. Individuals choose funds at a bank provider from a government-run investment menu. Source: Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions., Inc., 2020. ESI analysis of Census Bureau Current Population Survey and BLS National Compensation Survey Data and https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/kiwisaver/appointment-of-kiwisaver-default-providers/, accessed November 19, 2021.

Source: Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions, Inc., 2020. ESI analysis of Census Bureau Current Population Survey and BLS National Compensation Survey Data and https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/kiwisaver/appointment-of-kiwisaver-default-providers/, accessed November 19, 2021

The trend worldwide is universal coverage in retirement plans. I believe we’ll get there eventually, but in our uniquely American way.

– Jason Bortz

How you can make the trend your clients’ friend


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.



Jason Bortz is a senior counsel with 24 years of industry experience (as of 12/31/2021). He holds a juris doctor degree from Cornell Law School and a bachelor’s degree in philosophy from Hamilton College.


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