Jeff Kempker, CEBS, CRC
A recent article in Forbes, Workplace Retirement Coverage Drops And The System Continues To Fail, by Teresa Ghilarducci, provides some sobering statistics about retirement preparedness for Americans. It is no surprise Americans who have access to a retirement plan at work will be better prepared for retirement than those without a plan. However, according to Ghilarducci, only 40% of workers in the U.S. are covered by a retirement offered by their employer. This is a 4% decrease since 2014 and this number has declined in 14 of the 17 years since 2000.
Why Employee Coverage in Retirement Plans is Decreasing
Since the creation of the 401(k) plan for private sector workers 40 years ago, companies have increasingly shut down their defined benefit pensions and placed the responsibility on their employees to produce their own retirement security. A 401(k) plan is one where the employee places a portion of their paycheck into an account that is invested in the markets. The employee is in charge of the investment decisions and directs their account as they see fit. The employer may also contribute to the employee’s account. These types of plans can work well and may produce good retirement outcomes if the individual saves enough, makes sound investment decisions, and manages their account so the money lasts the rest of their life during retirement.
One of the biggest drawbacks of a 401(k) is that they aren’t always mandatory for the employee to participate so many employees choose not to defer any money out of their paychecks. If the employee is not participating, the retirement plan is not helping the individual or the employer. This may be a reason for employers not to provide a retirement plan because participation rates among employees are low. However, there are many things an employer can do to increase participation in their plans, such as automatically enrolling employees in the plan when they are hired, increasing the employer contribution, and providing assistance in choosing investments.
Small employers also struggle to offer retirement plans for their workers. Providing employee benefits can be challenging for small employers. There aren’t as many efficient options available for small companies so many don’t even bother. The employee can still save on their own for retirement with an IRA, but odds of individuals saving on their own are much higher if they can have the money withheld directly from their paychecks before they even see it.
State and Local Government Employees Have an Advantage
While the retirement system in the private sector is sputtering, government workers have an advantage when it comes to retirement preparedness. Almost eight out of ten state and local government workers participate in a defined benefit pension plan offered by their employers. These plans almost always require the employees to participate and contribute to the plan and they provide steady monthly income during retirement. The amount of money a retiree will receive from the plan is based on how long they work (more public service = more benefits). Government employers continue to provide these plans because they work extremely well for all stakeholders when the plan is structured properly. In addition to the defined benefit pension, many government employers also offer an optional savings plan, similar to a 401(k), that employees may use to save more toward retirement.
Some government pension plans have come under fire in recent years for financial difficulties but those plans are in the minority. Most pension plans for state and local employees are humming along just fine. One reason for this is the willingness to change the provisions of the plan if needed. Since 2009, every state in U.S. has made meaningful changes to their pension plans that have better positioned these plans to fulfill their obligations well into the future.
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The Retirement Crisis in America is Real
Without a doubt, there is a retirement crisis in America. More and more people are approaching retirement without a pension and with little to no savings. And while those that work for government employers are better off in regards to these benefits, we as a nation must do better for private sector workers. There are solutions, we just need to be willing to talk about it. Congress can make moves that will put all Americans on better financial footing in retirement. Social Security needs to be fixed and private sector employers need better retirement plan options. The question is, will Congress make this a priority or will they wait until things get worse?
