A staggering 56 million private sector workers do not have access to a retirement savings plan through their jobs, according to Pew Charitable Trusts research released in May 2023. This is contributing to a retirement-savings gap that could create a $1.3 trillion economic burden through 2040.
“The retirement savings gap is the difference in the amount of money an individual has saved versus the amount of money they will need in retirement,” said Garry Payne, founding partner of the Carta Group, a division of Community Bank, N.A.
Social Security cannot bridge the retirement savings gap alone. According to the Center on Budget and Policy Priorities, for an individual who worked all their adult life at average earnings and retires at age 65 in 2022, Social Security benefits replace about 37 percent of past earnings.
“Education is so critical in talking about bridging that retirement savings gap,” said Payne, who notes that education applies to both employers and employees.
For employees, it means retirement readiness education to make sure that when they’re in any of the three phases of their retirement years — go-go, slow-go, and no-go — they have everything they want and need.
“You have to plan for each of these stages,” said Payne, who notes retirement readiness education is unfortunately not done regularly at some companies. It can be provided internally and/or externally by the financial planning group that brought a particular plan to the company.
Education for employers often means addressing fears and fallacies about offering retirement plans.
Among the many statements Craig Silverstein, senior product strategy manager at Paychex, has heard from businesses about why they don’t offer 401(k)s for their employees are: “We’re too small,” “It’s too costly,” “It’s too complex.”
These are all misconceptions, says Silverstein, who notes that, thanks to work the federal government has done over the past several years, “There’s probably never been a better time for a small to mid-size business to offer a plan.”
For example, part of the 2019 SECURE Act created the opportunity for businesses without common interests to pool assets into a single, large 401(k) plan called a Pooled Employer Plan (PEP). This plan removes some of the administrative, financial, and liability obstacles that have made it challenging for smaller businesses to offer such plans.
To offset startup costs, the act also provides eligible employers with up to $5,000 in tax credits, with an additional $500 tax credit available for using automatic enrollment in the plan, for the first three years that the plan is effective.
“A pooled plan provider can go in and be the plan sponsored administrator and remove a lot of the fiduciary and the administrator burdens off the plate of these small business owners,” Silverstein said. “Between the costs going down and the complexity being addressed by some of these things [like PEP], there’s real little reason for an employer, not to start offering a plan now.”
Once a business owner decides to offer a 401(k) there are steps they can take to make it more accessible, said Silverstein, like having very open eligibility requirements (e.g., allowing part-time workers to participate fully in the plan) and offering matching contributions.
Silverstein also stresses the need for comprehensive financial education for employees as a component of a company’s retirement plan.
“It is important that employees understand the position they’re in from a retirement savings perspective and the benefits of the 401(k) plan,” he said. “All Americans should be saving for retirement and getting them into a 401(k) plan is going to be the best way for them to do it.”
Getting more of the less compensated employees of a business into a plan is important, according to Alecia Fisher Dougherty, CFP, managing director, Naviter Wealth, LLC.
“There are a variety of ways to help with that,” A. Fisher Dougherty said. “First of all is to set up auto-enrollment, which means that the participant, a new employee, would have to negatively consent to the enrollment. We find that if an employee is automatically enrolled, they don’t miss that money at the very beginning, and they’re more likely to keep contributing to it as well.”
Richard A. Dougherty, CFP, AIF, managing director, Naviter Wealth, LLC notes that offering a Roth 401(k) provision is a popular way to draw younger employees specifically into a plan.
“The dollar that you contribute today is taxable, but all of the earnings grow tax deferred and also come out tax-free during your retirement years,” said R. Dougherty, about a Roth 401(k) provision. “So really, it benefits the younger employees or participants because it allows for tax-free distributions at some point in the future, which is obviously the retirement years.”
Doug Hendee, CFP, chief sales officer, senior vice president of Brighton Securities says when it comes down to it, education is both the biggest hurdle and most important piece in bridging the retirement savings gap.
“The easiest way to close that gap is to have access to an employer-sponsored retirement plan,” Hendee said. “If you don’t have access to a corporate-sponsored plan through work, set up an IRA. The earlier you do so the more time it will have to grow and the more you’ll close the retirement gap.”
Hendee says he is excited by the conversations he’s been having lately with newer members of the workforce about retirement planning.
“I am so encouraged and pleasantly surprised with what I’m seeing with this younger generation of workers,” he said. “They want to improve their situations, they want to create a better place, and they want to be offered the tools to do so.”
With current labor challenges, these tools are becoming increasingly more important as employees of all ages are looking at not just what an employer will pay them, but what benefits they will offer, like retirement plans.
“One of the easiest ways to lose employees is not offering a comprehensive suite of benefits,” Hendee said.
Caurie Putnam is a Rochester-area freelance writer.