Data & Research June 15, 2016

Employers Overwhelmingly Think 401(k) Plans Are Critical

But fewer than one in four part-time workers have access to such a plan.
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The vast majority of workers (89%) view a 401(k) or similar plan as an important benefit, according to a new report from the Transamerica Center for Retirement Studies, “The Current State of 401(k)s: The Employer’s Perspective.” A similar percentage (84%) of employers believe their employees see such a benefit as important. Seventy-four percent of employers offer a 401(k) or similar plan to their employees. However, only 38% of employers with a 401(k) plan offer them to their part-time workers.

Automatic enrollment is not being embraced by a majority of employers. Only 41% of large companies (those with 500 employees or more) offer automatic enrollment, compared with just 28 percent of small companies (100 through 499 employees) and 18% of micro companies (10 through 99 employees). Automatic escalation is also more prevalent at large companies, with 43% automatically increasing participants’ contributions annually, compared with 26% for both micro and small non-micro companies.

By comparison, 71% of employees would like to be auto-enrolled into their plan, and 67% would like it to include auto-escalation. Thirty-seven percent of workers expect savings from 401(k)s, 403(b)s and/or individual retirement accounts (IRAs) to be their primary source of income when they retire.

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Among companies that do not offer a 401(k) or similar plan, only 27% say they are likely to begin sponsoring a plan in the next two years. Among those not planning to do so, their most frequently cited reasons are: their company is too small (58%), concerns about cost (50%), lack of employee interest (32%), and lack of company or management interest (27%). However, 22% of those unlikely to offer a plan indicate they would consider joining a multiple employer plan (MEP) offered by a vendor that handles many of the fiduciary and administrative duties at a reasonable cost.

NEXT: How many companies offer a match?

Smaller companies lag behind larger companies in offering matching contributions as part of their 401(k) or similar plan. Seventy-three percent of all plan sponsors offer a matching contribution, with 71% of micro companies and 77% of small companies doing so. Eighty-five percent of large companies offer a match.

Among workers who are offered a 401(k) or similar plan, the plan participation rate is 80%. Micro company workers (83%) and large company workers (80%) are more likely than small workers (73%) to participate. The median annual salary deferral rate is 8% and is similar among workers of all company sizes.

Among workers who currently participate in a plan, 23% have taken some form of loan and/or early withdrawal from a 401(k) or similar plan or IRA. Among those who have taken a loan from their 401(k) or similar plan, the most frequently cited primary reasons were unplanned major expenses (23%) and paying off debt (23%). To a lesser extent, purchase of a vehicle (11%), home improvements (8%) and medical bills (8%) are cited as the primary reason.

Among those who have taken a hardship withdrawal, 28% said their primary reason was to pay for certain medical expenses. Another primary reason for the withdrawal was payments to prevent eviction from primary residence (17%). The third most frequently cited reason was payment of tuition and related educational fees for the next 12 months of post-secondary education (14%).

As of 2015, the estimated median household retirement savings was $63,000; however, it was higher among large-company workers ($79,000) than among micro-company workers ($51,000) and small non-micro-company workers ($48,000). Among age 50-plus workers, the estimated median household savings was $135,000; however, it was higher among age 50-plus workers in large companies ($142,000) than those in micro-companies ($119,000).

Transamerica Center for Retirement Studies based its findings on a Harris Poll of 1,022 employers conducted last fall and a Harris Poll of 4,550 workers early last year. The full report can be downloaded here.

Compliance June 15, 2016

SSGA Lobbying Congress on Mandatory Retirement Plan Bill

Following the firm’s open letter to Congress, it is working with key Senate and House members to submit a bill.
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Noting that it has been 10 years since the passage of the Pension Protection Act (PPA), State Street Global Advisors (SSGA) last week held meetings with key members of the Senate Finance and Health, Education, Labor & Pensions committees to discuss drafting a new bill to make retirement plans mandatory among all private sector businesses with 100 or more employees. 

In the coming weeks, SSGA will be meeting with the Senators’ counterparts in the House.

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“Pieces of the PPA had been circulating for a decade,” said Melissa Kahn, managing director of retirement policy for defined contribution at SSGA, speaking at a press conference in New York on Wednesday. “Remember, that was a standalone bill. We think we are ready for another standalone bill.” 

The fact that so many states are in the process of creating their own mandatory retirement laws indicates that politicians are ready to take on this challenge, Kahn said. “Response from policymakers has been positive, from both sides of the aisle,” Kahn said.

The dual problems of longevity, which could increase even more in coming years, and today’s low-yield environment mean that people need to save 50% more than they did 10 years ago, said Fredrik Axsater, global head of defined contribution at SSGA. “Time is not on our side,” he said. “We need to act now. America faces a $4.13 trillion retirement savings shortfall, according to EBRI [Employee Benefit Research Institute] data. Deficits range from $19,304 a year for married couples to $62,734 for single women.”

This prompted SSGA to develop a policy proposal based on three key principals, Axsater said. “We wanted to make sure that it would be comprehensive, that it would be straightforward and built on the existing platforms, and that it would attract bipartisan support and instant buy-in.”

The proposal itself, which SSGA introduced in early June through its open letter to Congress and a white paper, calls for four key tenets. These include automatic enrollment at a 6% deferral rate for all workers in the private sector in companies with 100 employees or more, within the money routed into well-diversified, age-appropriate portfolios; auto escalation by 2% a year up to a threshold of 12%, or more, if the employer so chooses; tax credits for small employers; and eliminating barriers to multiple employer plans (MEPs).

Such coverage is critical, Axsater said, since 40% of people do not have access to a workplace retirement plan today. The percentage of people who opt out of automatically enrolled plans is small, he said.

NEXT: Low start-up costs

In fact, employers that are currently not offering a retirement plan might be surprised by how enthusiastically their employees embrace it, noted Brigitte Madrian, professor of public policy at Harvard’s Kennedy School of Government. “Even the poor in developing countries want to save, and can save,” she said. And the cost of offering a plan might surprise small businesses. Madrian currently serves on the board of a 15-person start-up, which discovered that the cost of offering a basic plan is a mere $3,000, in addition to which, they can receive tax credits.

This is why SSGA is so enthusiastic about limiting the barriers to MEPs. “This would provide scale to small businesses,” Axsater said. Madrian added: “This is extremely complementary to automatic enrollment, because if a small company doesn’t have the expertise, they can piggyback on an existing structure—in addition to which the sponsor can assume the fiduciary responsibility. Madrian said that by eliminating the requirement that MEPs be managed by companies in the same industry, MEPs could be managed by a payroll processing firm, a local  Chamber of Commerce or an industry organization.

“We think we are at a tipping point,” Kahn said. “We have a brewing crisis. We need to have this as part of the national conversation. Because MEPs, for example, are partially overseen by the Department of Labor and partially overseen by Treasury, it is easier to enable this through a legislative push. The senators we met with said they are getting bipartisan support on retirement.”

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