The access gap is a threat to retirement savings success

If bills with bipartisan support on Capitol Hill gain momentum and policy advances, we may see a significant easing of one of the leading issues dogging the 401(k): the access gap.

More than 40 million American workers do not have access to a retirement savings plan as a benefit of their employment. Research from EBRI shows that without a savings plan at work, the percentage of workers saving on their own in an individual retirement account (IRA) plummets to single digits. Without a plan, these workers face challenges to saving.

It is worth noting that 70% of moderate income workers do save if they have access to a workplace savings plan such as a 401(k), proving that workplace plans are 15 times more effective than the individual, voluntary tax breaks provided by an IRA.

Across the land, the situation is less than optimal. Nearly one-third of households approaching retirement have no retirement savings at all. And in recent weeks, we have seen data that seniors are filing bankruptcy at alarming rates due to inadequate savings and high health costs.

The dream of a universal workplace 401(k)

Why isn’t the 401(k) offered universally by employers? One reason is that due to cost, administrative, and regulatory obstacles, small and midsize businesses are less likely to offer retirement savings plans.

In 2016, there were 5.6 million employer firms in the United States. Firms with fewer than 500 workers (considered small businesses) made up 99.7% of the total.

Small businesses are an important economic driver and employ some 59 million people — about 48% of the U.S. workforce.

Imagine the impact if the rules made it easier for all small businesses to provide retirement savings plans for their workers.

A bipartisan wave

Numerous proposals have been introduced in Congress this year that seek to expand access to retirement savings and increase the adoption of successful plan design features like automatic enrollment.

Among them is The Retirement Enhancement and Savings Act of 2018 (RESA). RESA was originally introduced in the Senate earlier this year by Finance Committee Chairman Orrin Hatch (R-UT) and ranking member Ron Wyden (D-Ore.). It has since been introduced in the House and has bipartisan support, with more than 60 co-sponsors.

As one of the most comprehensive retirement bills before Congress, RESA would remove obstacles including regulatory barriers, and would lower costs for small businesses to establish multiple-employer retirement savings plans — plans offered by a pool of employers. The bill also proposes incentives for businesses to establish retirement savings plans and adopt automatic enrollment and auto-escalation of deferral rates.

Additional proposals, also introduced with bipartisan support, address the access gap issue and challenges facing millions of Americans trying to save. And, recently, the House introduced a "tax reform 2.0" package that included several similar retirement proposals. The package, which included some, but not all of the concepts that are in RESA, passed the House Ways and Means Committee.

And a recent executive order demonstrated the Administration's focus on retirement security, calling for a review of rules around IRAs and expanding access to MEPs.

Time for a 401(k) re-set

The 401(k) has made significant progress over the past several decades, helping millions save for a dignified retirement. Challenges remain, but the 401(k) is adaptable and has proven success on many fronts.

The 401(k) has to be among the most studied investment vehicles since the first plans gained momentum in the 1980s, as well as in the years following the game-changing innovations introduced by the Pension Protection Act of 2006. In short, we have learned what works:

• Workplace savings plans can provide Americans with an efficient and effective way to pursue retirement success.
• Automatic features, such as auto-enrollment and auto-escalation, greatly increase a saver’s retirement preparedness.
• Plans must aim for a deferral level of 10% or more — higher than the roughly 7% levels that today’s workplace plans achieve on average.
• Measures that encourage more companies to offer retirement plans will narrow the access gap and boost participation.

We can invest in education and communication, but it is public policy that will pave the way for Americans to meet the retirement savings challenge.

A comprehensive, well-researched, bipartisan approach will be needed. If any of these ideas to improve access to retirement savings gain momentum in Congress this year, it’s a good start.

For an in-depth discussion of this and other retirement issues facing Americans today, please see my book, From Here to Security: How Workplace Savings Can Keep America's Promise.

The opinions expressed here are my own and not those of Putnam Investments, Empower Retirement, Great-West Financial, or their subsidiaries, and are not intended as tax, legal, or investment advice.