Industry and Congress Agree the Coverage Gap Is a Big Problem

The Senate Health, Education, Labor and Pensions (HELP) Committee hosted a hearing Thursday morning on the topic of improving the financial stability and retirement security of U.S. workers.

The hearing included detailed testimony from experts in employee benefits, personal finance and retirement policy. The speakers included Lori Lucas, president and CEO of the Employee Benefit Research Institute (EBRI); Shai Akabas, director of economic policy at the Bipartisan Policy Center; Deva Kyle, of counsel at the law firm Bredhoff & Kaiser; and Dave Gray, head of workplace retirement products for Fidelity Investments.

While the speakers covered a variety of topics related to improving retirement security, one theme clearly received the most attention and agreement: the necessity of closing the coverage gap that exists in the defined contribution (DC) retirement system. In other words, the speakers all agreed that DC plans do great things for workers’ financial futures, helping people generate substantial amounts of assets over time by participating in the growth of the equity markets. But they also noted that huge swaths of the workforce are shut out of the DC plan system entirely. In particular, they cited statistics showing that employees of small and midsized businesses broadly lack access to 401(k) plans.

“Our extensive research shows the probability of a successful retirement is so closely linked to the question of access,” Lucas said. “Our research shows that merely having access to the DC plan system boosts a workers’ likelihood of having a successful retirement outcome by 50%.”

Lucas pointed to various statistics demonstrating the coverage gap is the most severe for workers in the small business community, as well as for workers of color and women. In addition to the barriers presented by systemic racism and gender biases in the workplace, both groups are over-represented in the small business economy.

“Simply put, many smaller companies cannot afford to offer the existing type of traditional retirement plans,” Lucas said. “It is positive that the SECURE [Setting Every Community Up for Retirement Enhancement] Act created a new marketplace for pooled employer plans [PEPs], which was a great step, but we can do even more to improve coverage, for example passing the SECURE Act 2.0, which will further streamline and incentivize participation in PEPs.”

Senator Patty Murray, a Democrat from Washington who is the chairwoman of the HELP Committee, highlighted how the ongoing coronavirus pandemic has destroyed millions of jobs, marking exactly the kind of economic emergency that could make the coverage problem even worse. Senator Richard Burr, a North Carolina Republican and the committee’s ranking member, echoed that point, agreeing that retirement security policies represent a rare opportunity for genuine bipartisanship in the current Congress.

“The retirement planning system today is built around the DC plan, and our question today should be about what is working well and what we can improve,” Burr said. “The DC plan system itself works great, but it doesn’t work great for those who do not or cannot participate. What I believe we need to do is help employers offer, operate and fund these all-star DC plans. The freedom and flexibility of DC plans are crucial components of our retirement system. DC plans show how regular folks can benefit from the growth of corporate America and the growth of global investments.”

During his testimony, Akabas agreed that PEPs could help close the coverage gap, but he warned against the appeal of “looking for a silver bullet.” He suggested that reforms to the assignment of the fiduciary duty applying to retirement plan sponsors under the Employee Retirement Income Security Act (ERISA) should be considered when it comes to the smallest employers. Many of these employers entirely lack a human resources (HR) department, he said, leaving many of them to feel the provision of a retirement plan is impossible.

“Can Congress help solve this issue? I think so, potentially by transferring the fiduciary duty to the providers in such cases, and allowing small business owners to stay on the sideline beyond their role in managing the payroll deferrals,” Akabas suggested.

During her testimony, Kyle spoke about the racial and gender coverage gap, highlighting how the average white family in the U.S. holds approximately five times the liquid retirement savings of the average Black family.

“It is undeniable that there are severe class and racial disparities in today’s DC plan system,” she said. “Furthermore, retirement policy that relies entirely on the individual continues to exacerbate income inequality. Strengthening the ability of unions to negotiate for better working conditions and better compensation is one policy solution I see, as is strengthening Social Security for the long term. These are just some of the steps that can help us close the glaring disparities in the system.”

Gray echoed these comments while highlighting the early success of his firm’s PEP program, which has already attracted a wide variety of small businesses.

“Our initial offer is deliberately focused on the needs of small businesses that do not yet offer a plan, and we are having success in reaching these types of employers,” Gray said. “Some of our peers in the industry are doing the same, and we find this very encouraging for closing the coverage gap. We believe there is real pent-up demand from small business employers. Many of them want to be able to provide these benefits, they just need an affordable and manageable way to do it.”