It’s a stubbornly intractable problem that haunts social policy of all kinds in the US. Our employer-based benefits system, a relic of World War II-era wage controls, is divided in two.
On the one hand, employers with well-resourced Human Resources departments and sophisticated worker recruitment and retention strategies offer a suite of well-designed benefits, including retirement plans, to their workers. On the other hand, smaller businesses (those with fewer than 100 employees) – which account for 17 percent of the workforce and 63 percent of all new job creation – struggle to find the time, stable revenues, and expertise to provide retirement and other benefits to their workers. These are hard-charging small business owners with lots to do each day to keep the lights on, after all, not professional benefit managers.
In a country that relies on employers to be the main conduit for benefit delivery, this stratification poses a dilemma. How do we continue to encourage and preserve the benefits being offered by larger businesses, while closing the coverage gap for workers at smaller ones? Answering this question could go a long way to solving the retirement security crisis in the US.
To start formulating an answer, we reached out to some of the men and women in the private sector who are working every day to expand retirement security to small business owners and their employees. The result, a six-part blog series, illuminated a number of key takeaways:
- Most small business owners want to do the right thing. Though the statistics above may give the impression that small business owners do not care about offering their workers benefits, that’s simply not true. As one small business owner explained to a journalist recently, “I just don’t have the time [to set up a retirement plan]; it’s not that I don’t want to.” This substantiates what Joyce Yan Zhang at Captain401 found in the many conversations she and her colleagues have had with business owners across the country.
- Fees matter. As Employee Fiduciary’s Eric Droblyen explained in his post, the “all-in” fee for small business retirement plans vary widely across the industry and can be quite high, creating a barrier to entry for small firms. Droblyen recommends that plan designers mimic the federal government’s Thrift Savings Plan, which uses passively-managed index funds to keep costs low while producing solid returns.
- Technology can help streamline plan administration. As Zhang described in her post, there are many aspects of plan administration that can benefit from automation, including reporting and compliance, payroll contribution, employee onboarding, and rollovers.
- Getting an employer signed up is only half the battle. Though most of the focus on closing the coverage gap justifiably centers on getting small businesses to start offering plans, ForUsAll’s Shin Inoue and others have recognized that driving improved participation and performance in plans that already exist – often through automatic enrollment and escalation – can be just as important.
However, as we worked with the authors to distill these insights and publish the posts, it became clear that there was a fundamental tension lurking beneath the surface.
On the one hand, much of the disruption happening in the small business retirement space is focused on reaching more small businesses – by lowering costs, better integrating with payroll systems, demonstrating the tax advantages, and relieving employers of as much of the administrative burden of offering a plan as possible. There is much promise to this approach. Indeed, the top two reasons small employers do not offer plans, according to research from the Pew Charitable Trusts, are that they’re too expensive to set up and that firms do not have the necessary administrative resources to manage a plan. It’s logical, then, that if new industry entrants get the price and administrative burden down low enough – and somehow overcome the distribution challenge of connecting with the hundreds of thousands of often hard-to-reach small firms – the coverage retirement gap could quickly become a thing of the past.
But some of the blog authors believe that, to really move the coverage needle, a more radical paradigm shift is needed. And indeed, with “gig economy” jobs and other contingent work proliferating, building upon the existing traditional employer-based system may not be sufficient. Instead, these authors argue for creating new institutions for aggregating risk and delivering benefits. For the National Association of Retirement Plan Participants’ Laurie Rowley, the new paradigm is called Icon, and for Prudential’s Bennett Kleinberg, it’s called multiple employer plans (MEP) – but it’s likely too early to know the exact product or business model that will best epitomize this approach.
These two approaches for expanding access to retirement plans – building on the current system and building new institutions – are not mutually exclusive. For example, state auto-IRA programs will likely both expand the number of small businesses offering plans and create a new public-private partnership for delivering coverage to those who fall through the cracks. This is because the state programs require that all employers (with some exceptions for very small firms, depending on the state) either offer a retirement plan to their workers or automatically enroll them in the pooled, state-sponsored “Secure Choice” IRA. With this synergy in mind, some private sector entrepreneurs, including Guideline’s Jeff Rosenberger, are building plans and sales strategies to take advantage of the Secure Choice opportunity.
While the level of entrepreneurial activity in the retirement industry is exciting, it remains to be seen if this enthusiasm will translate into large-scale change. Already, thousands of never-before-reached small businesses are offering plans thanks to new offerings from industry start-ups as well as more established players. But with 55 million workers uncovered – 32 million of whom work for small firms – it is unlikely that entrepreneurs can fix things on their own. New policies, like state auto-IRA programs and open MEPs, as well as new institutions that take some of the burden off of traditional employers, could spur and complement private sector innovation in ways that create comprehensive and lasting solutions.