The lack of Americans’ retirement savings, referred to as “retirement insecurity”, is a topic we are hearing more and more about as the Boomer generation ages into retirement. Private company pensions are few and far between these days, putting the onus of saving for retirement on individuals, rather than corporations. Compounding the issue of the lack of retirement savings is the fact that Americans are living longer and will need to save more to cover living expenses and potentially higher medical costs later in life. Elected officials have responded to the potential crisis by enacting legislation such as the SECURE Act (Setting Every Community Up for Retirement Enhancement) and the OregonSaves program.
Although men and women across all races face challenges when it comes to saving, retirement insecurity is especially an obstacle for people of color, who, on average, are less likely to have access to retirement savings plans and fewer funds saved for retirement (even when studies control for age and income). Hopefully continued policymaking focused on addressing the disparities in access to investing and saving can decrease the uncertainty all Americans face when it comes to retirement.
- What are the facts when it comes to retirement insecurity?
According to the National Institute on Retirement Security, 45% of working-age Americans don’t have any assets saved in a retirement account, and the average American household approaching retirement has only $12,000 saved in retirement accounts (National Institute on Retirement Security). With those figures in mind, it comes as no surprise that half of American households are at risk of being unable to maintain their standard of living in retirement due to a lack of funds to cover expenses. When it comes to employer-provided retirement plans, 62% of White workers have access through their jobs, 54% of Black and Asian workers, and only 38% of Latino workers (National Institute on Retirement Security). Fortunately, there is a high rate of participation across all races for those who do have access to these plans.
- How does the SECURE Act affect access to 401(k)s?
One of the barriers preventing companies from offering a retirement plan are the upfront and ongoing administrative costs. Employer-sponsored retirement plans can be expensive, especially for small businesses. Prior to the SECURE Act, employers received a three-year $500 credit to help offset the start-up and ongoing administrative costs of new 401(k) and Simple IRA plans. The SECURE Act sought to do more to reduce this burden by increasing the credit available to small business up to $5,000 per year for three years, depending on how many non-highly compensated employees eligible to participate in the plan. (Non-highly compensated employees are considered to have less than 5% ownership in the company or those who made less than the prior year’s income threshold, $125,000 for 2019 and $130,000 for 2020 (Investopedia)). Additionally, there is a three-year $500 credit available for plans with an automatic-enrollment feature. This brings the maximum credit possible for small businesses setting up plans to a much higher $16,500 (Guideline).
Although it won’t go into effect for plans until after December 31, 2020, another change brought by the SECURE Act is the Pooled Employer Plan, which is a type of Multiple Employer Plan. The concept is to allow several, unrelated small businesses to join together in sponsoring a 401(k) plan, which helps reduce the fees associated with maintaining the plan. The Act also removed what was known as the “one bad apple rule” wherein an entire plan could be eliminated if it was determined that one of the plan sponsors wasn’t properly following the plan’s guidelines. We will see in 2021 and beyond if these SECURE Act provisions manage to increase access to and availability of employer-provided retirement plans in the way they were intended.
- What is the OregonSaves Program?
The OregonSaves Program is a state-run retirement program, the first of its kind. It was modeled after successful programs in the United Kingdom and New Zealand, as well as other large employer plans in the U.S. It’s available to employees in the private sector who don’t have access to a retirement plan at work and to those who are self-employed. It’s intended to be a solution for employers who don’t have the funds or resources to provide their employees with a 401(k) plan; employers don’t have to pay anything and are only responsible for helping employees sign up for the program. The program includes auto-enrollment, so any employees who are eligible to participate and don’t choose to opt out will be automatically enrolled and can begin making contributions to their retirement account through payroll deductions. The Oregon Retirement Savings Board has chosen various investments that can be selected by participants based on their appropriate risk-level. While this program may be the first of its kind in the nation, several states are following suit and developing their own programs (OregonSaves).
As we continue the national conversation on retirement insecurity, hopefully we can also address the racial inequality in access to retirement plans and increase the availability of plans for all workers. Regardless of how you save for retirement, it’s important to keep in touch with professionals who can advise you. Financial advisors can help you figure out how much to spend and save throughout your life, as well as manage your investments, and help determine the amount of investment risk that is right for you. If you’re not sure where to start, try reaching out to an expert who will guide you through the process of beginning to save for retirement or building upon the savings you already have.