Greater Access
Research based on the T. Rowe Price annual “Retirement Savings and Spending Study” along with analysis of the Census Bureau’s 2021 Current Population Survey found that about half of all workers participate in a retirement plan of some kind. When the retirement plan is offered by an employer, participation increases significantly, to 88.2%.
“These findings highlight that the first and most important step toward closing the retirement savings gap is to expand access to retirement plans,” says Sudipto Banerjee, vice president, retirement thought leadership with T. Rowe Price in Baltimore.
Black and Hispanic workers significantly lag in participation and savings compared with white workers, furthering the notion that plan access and plan design can help to close these gaps and encourage other positive financial behaviors, as well. Nearly six in 10 white workers participate in a retirement plan, compared with four in 10 Black workers and three in 10 Hispanic workers.
Some people are capitalizing on ways to reach these underserved markets. Finhabits Inc., in New York City, is a fintech platform that describes itself as “by Latinos for Latinos.” Company founder and CEO Carlos Garcia says Finhabits launched its 401(k) plans in response to the California state program, CalSavers, to provide employees with access to a retirement savings plan if one is not offered by their employer (see sidebar). He says interest in the Finhabits 401(k) plans has been steadily increasing.
The company worked with global retirement technology provider Smart to develop the two 401(k)s, which include, for example, automatic enrollment and automatic escalation features and what Finhabits’ website calls “a selection of lower-cost, straightforward and diversified retirement funds.”
“While CalSavers is great for some businesses, it’s not the best fit for everyone,” explains Jodan Ledford, CEO of Smart, in Nashville, Tennessee. 401(k) plans allow for much higher employee contributions, enable employers to make matching contributions, and offer a range of tax benefits for the business owners—unlike the CalSavers plan, Ledford says. “The combination of [California’s] mandate and our streamlined, low-cost technology means we’re able to deliver the benefits of 401(k)s to even the smallest of businesses,” he says.
Inclusive Plan Design
Cindy Rippel, senior director benefits and human resources operations at Mattress Firm in Houston, says customizing the company plan has been a great tool for recruiting and retaining workers, besides for competing with peers.
Due to the cyclical nature of sales, Rippel says, Mattress Firm has tailored its retirement plan to “ensure associates get the entire match, regardless of the timing of their contributions, through a true-up process.” She also says the company has implemented automatic enrollment for newly hired associates, and the plan additionally is available to all the company’s part-time employees ages 19 and up.
“We did it because, in retail, attraction and retention for all of our associates is very competitive,” Rippel says. “Offering this, along with basically all our other benefits to part-time associates—except medical because it disrupted the subsidy—increased our ability to attract and retain them.”
Allowing long-term part-timers to join a 401(k) plan is a key component of the Setting Every Community Up for Retirement Enhancement Act, enacted in 2020.
“Offering this along with basically all our other benefits to part-time associates—except medical because it disrupted the subsidy—increased our ability to attract and retain them.”
The SECURE Act aims to expand retirement plan access to Americans, by, among other things, incentivizing small businesses to offer a 401(k) plan. For instance, the SECURE Act provides tax credits to small businesses that start a qualified retirement plan, plus offers a new type of multiple employer plan that makes it easier for small, unrelated businesses to pool together and establish a single plan.
Additionally, the SECURE Act contains a vital compliance requirement: Starting in 2024, employers with a 401(k) plan must permit eligible long-term, part-time employees to contribute to the plan. While this may seem like a long way off, applicable employers needed to start tracking their part-timers’ hours last year.
As part of SECURE 2.0—the true name being the Securing a Strong Retirement Act of 2021, which Congress is considering—part-time workers’ 401(k) plan participation eligibility would move from three years to two.
Building a Plan Based on Participants’ Needs
Rippel suggests that sponsors thinking of customizing their retirement plans look at what they want to offer and how “creative” that necessitates they be.
“The complexities in legal requirements, filings, amendments and notifications generally are much more time-consuming and therefore costlier than a non-customized plan,” Rippel says. “So take some time to weigh your options, relevant to ongoing needs of the business.”
Sometimes, too, creativity is demanded by a special circumstance or participant request.
This was the case for ASM Research, as Tammy Lassiter, the firm’s HR administrator, described in a panel at the 2022 PLANSPONSOR National Conference, in Orlando, Florida, in June. Lassiter explained that a Muslim employee presented her company’s retirement plan committee with an issue: The Islamic faith does not allow for interest to be earned on funds, and, thus, those who follow Shariah law may not participate in most 401(k) plans.
The new employee was concerned that she was being automatically enrolled into the company’s 401(k). While it was an easy fix to change her deferral rate to 0%, there was no way for her to waive the employer discretionary contribution. With the help of its plan adviser, Sagemark Consulting, ASM Research made two plan changes:
A religious exemption was added to the plan document to allow nonparticipation in the plan, and a Shariah-compliant fund was added to the fund lineup. This second change ensured that Muslim employees could participate in the plan and benefit from company contributions.
While these plan design changes were prompted by an employee’s specific issue, advisers can also guide their clients to proactively adopt innovative ideas for plan design—e.g., to help participants save more for retirement or improve their financial wellness.
Nathan Voris, director, investments, insights and consultant services for Schwab Retirement Plan Services Inc., in Richfield, Ohio, says retirement plans should be customized based on the company, the company culture, the financials and what the employer thinks is right for its participants.
“Most plans are customized. Each plan is pretty unique to the sponsor,” Voris says. “The way you structure your match contribution, the way you structure your eligibility, the investment options you choose for the plan—by and large, all of our plans are customized by the sponsor on some level.”
A frequent big driver of plan design is the participants’ income replacement needs, Voris says. For example, a large retailer may have a vast majority of its workers in a similar income band and have a specific income replacement. “So it might want to design a plan with a match structure based on those needs,” he says.
But “if you’re a high-tech manufacturer and have a lot of high-salaried individuals who have a different Social Security makeup, you may want to stretch your match out,” Voris says. “You try to use all the tools in your tool kit based on the needs of that population and that participant base.
“The outcome can lead to a customized plan that’s built not only for the company but also the participants who work there,” he says.
MARIA, a janitor in the San Francisco Bay Area, had been working in her industry for two decades without access to a retirement savings plan. A couple of years ago, she was enrolled in a program offered by the state of California through her employer, Janico Building Services, in North Highlands, California. “Maria came to her manager and was ecstatic,” says Lorenzo Harris, president of the company.
The program, CalSavers, was designed to reach employees such as Maria—people without access to a 401(k) or similar plan through their employer. By some estimates, 57 million workers in the U.S. have no access to a retirement plan, at work.
In recent years, 13 states, according to ADP, have enacted retirement savings programs to help individuals defer some of their earnings for retirement. The rules of these state-mandated programs vary greatly from one to another, but they could help bridge the retirement gap for as many as 41 million uncovered U.S. workers.
When she was enrolled, Maria had worked for Janico for some time but had no retirement savings plan because her employer, like many small companies in California, thought they were too expensive. That changed when Janico became the first company to enroll in the California program, which offers automatic, portable individual retirement accounts via the employer.
Initially, Harris says, he viewed the program as a “typical” government mandate—in other words, a burden. “California is notorious for creating legislation that favors employees over employers,” Harris says. But he later came to see it as a good thing—not only for his employees, but also for his company. Looking back, he says, the program has helped him with recruiting and was easy to implement.
In early July, about a week after a key enrollment deadline, CalSavers met a remarkable milestone: It moved from having enrolled one company—Janico, in November 2018—to passing the mark of 100,000 enrolled employers
The program, CalSavers, was designed to reach employees such as Maria—people without access to a 401(k) or similar plan through their employer.
That number represents a steep rise from the 38,000 enrolled employers at the beginning of this year’s second quarter, says CalSavers Executive Director Katie Selenski. At the time of writing, CalSavers had over 283,000 funded accounts and $232 million in total assets. The average monthly contribution per saver was $164.
“We are a little tired from the rush but thrilled with the response,” says Selenski. “Employers have just been pouring in. Our teammates working on the phone are working overtime to meet the need.”
At the end of the June 30 deadline day, by which the final wave of companies should have registered, CalSavers had a 77% response rate, up from a 61% response rate at the end of the last wave, Selenski says.
“Employers are saying that enrolling was not as difficult as they’d expected. In general, I think they’re glad to have a way to facilitate their employees’ access to retirement savings at no cost to themselves,” she says.
California mandates that companies with at least five California employees be registered for the program if they have no 401(k) or other retirement plan type that exempts them or face fines.
Implementation of the program has had another positive effect: 98,000 employers had reported an exemption because they had either launched a private plan or reported their existing plan for the first time. “This number tells you there are many employers that are choosing a private option,” Selenski says.
Others, too, have noted how the private sector is responding. Selenski applauds what has been going on in the private sector as a result of California’s mandate. “We think the expansion in private coverage is great, and we’re encouraged to see the innovation on the private-product side.”
Scott Parry is a senior vice president at Ascensus, the company that administered Oregon’s plan. Ascensus now operates CalSavers’ plan, along with the plan in Illinois. “For one program, CalSavers has had a phenomenal impact on retirement savings,” Parry says.
Ascensus, which had built technology to manage 529 college-savings plans, took that technology and rebuilt it to work with the rules of state automatic-IRA programs. “We built a system that allows states to be in compliance with the legislative mandates while being low-cost and scalable,” Parry says.
Of the employees enrolled in CalSavers under the state’s mandate, the opt-out rate during the first 30-day period is about 25%, Selenski says. Then it goes up about 10% after enrollment, when people’s circumstances change or they change their minds about participating, to a total of 35% opting out.
“We are impressed by these rates when you consider the cash-flow needs of participants who have an average income of less than $30,000 a year and the fact that they’re not getting a match or incentive,” Selenski says. —Rhea Wessel
Art by Tilda Rose