David J. Kupstas, FSA, EA, MSEA Chief Actuary
“Americans Are Not Saving Enough for Retirement.” Have you ever seen a news story with that headline or something similar? Sure you have. Even casual followers of the news probably see it at least once a year. It’s a story that’s been around forever. I specifically remember reading it – repeatedly – when I entered the retirement plan profession 20 years ago. Ben Franklin probably wrote articles about retirement saving.
After a recent survey by Bankrate.com, we now have another set of news items on this topic making the rounds, including this one from our local paper, the Richmond Times-Dispatch. Why would I read an article like this when I know exactly what it’s going to say? Well, it was either that or stare at the wall while eating my Quaker® Oatmeal Squares brand cereal.
As it turned out, the Times-Dispatch article was surprisingly thought-provoking. For starters, one investment professional felt the high percentage (36%) of Americans not saving for retirement was not surprising “given the number of people who work for small businesses or are self-employed and don’t have retirement plans.”
Really? And why wouldn’t a small business or self-employed individual not have a retirement plan? They are allowed to have retirement plans, just like large corporations. In fact, some of our most creative plan design is for small businesses, including the self-employed (sole proprietors, partnerships, some LLCs). Due to coverage and nondiscrimination rules, employees at these small businesses are very likely to receive contributions from their employer, in addition to any money the employee wishes to contribute from his own paycheck.
That’s all well and good, you say, but most small businesses are struggling to get by and don’t have the funds for this “creative plan design” you speak of. Fair enough. For such employers, there are low-cost options such as SEPs or SIMPLEs. Under a SIMPLE IRA or 401(k), the company’s cost for employees can be as little as 2% of payroll. Moreover, the governmental reporting requirements are reduced and the rules are simpler (hence the name).
Still too expensive? Okay, let’s look at the other side of the equation: the employee himself. The Times-Dispatch article indirectly quotes the Employee Benefit Research Institute as saying access to a retirement plan [at work] does make a big difference in whether people put aside money for retirement.
While not all employees have access to retirement plans at work, all employees do have access to retirement plans. They’re called IRAs. An employee may contribute up to $5,500 per year ($6,500 if age 50 or older) in 2014 to a traditional or Roth IRA. There should be no discussion about lack of a workplace retirement plan for any individual until that individual has set aside the maximum in his or her IRA.
In conclusion, we understand that some employees may be struggling with day-to-day expenses and retirement saving may be far down the priority list. But to say that lack of a workplace retirement plan is the reason for an individual’s not saving is an argument that holds no water whatsoever.