The greatest weakness of the U.S. retirement system is that approximately 55 million workers, as estimated by AARP, do not have access to an employer-sponsored retirement savings account.
Most of them also are not taking advantage of individual retirement accounts, either through lack of knowledge or inertia. And studies show employees whose employers sponsor a retirement savings plan are far more likely to save for retirement.
Every reasonable avenue must be explored to enroll those employees in retirement savings accounts so they do not have to rely solely on Social Security when they retire — it was never intended to be the only financial resource of workers.
With IRAs, there is no one really responsible for selling the idea to workers, particularly lower-income workers or those at small and midsized companies. Another problem is the lack of incentive for employers to encourage employees to set up IRAs. There is even less incentive for employers to contribute to a Simplified Employee Pension IRA or a Savings Incentive Match Plan for Employees IRA, two vehicles already available. Small employers are more concerned about ERISA's fiduciary rules and possible paperwork hassles.
Congress could have acted on the problem by providing incentives, maybe tax incentives, for small businesses to participate in multiple-employer plans or use SEP or SIMPLE IRAs to encourage retirement saving. But Congress has not done so. It could have urged the Department of Labor to form a group to focus on marketing the idea to small businesses and provide guidance.
Likewise, judging by the 55 million workers without a retirement saving plan, the financial services industry has failed to successfully reach out to workers or their employers. Yet it has opposed the efforts of states and cities to help the workers.
DOL rules allowing cities and other large political subdivisions to set up IRA-based plans for private sector workers were reversed a year ago when President Donald Trump signed legislation voiding them. Still, the states — most recently Wyoming — continue to push forward on setting up or studying such plans.
It is time for the federal government, in particular the DOL, to come together with states and the financial services industry to work on solutions to the problem.
The DOL can work with the industry and the states to put forward programs to motivate employers to encourage employees to take advantage of the various IRA options.
Alternatively, the DOL and the financial services industry can work with the states to build the best secure choice programs possible for the uncovered employees without placing significant burdens on employers.