Over the last three decades, the U.S. private sector retirement system has undergone significant change. According to the Bureau of Labor Statistics, between 1980 and 2014 the proportion of private sector employees enrolled in defined benefit pension plans decreased from 38 percent to 16 percent. At the same time, participation in employer-sponsored 401(k) plans and individual retirement accounts (collectively called defined contribution plans) increased from 8 to 42 percent.
A number of factors may have driven this shift. Many employers see defined contribution plans as a way to manage their long-term liabilities. Some employees have a preference for a “portable” option that can move with workers as they change jobs. Perhaps most significantly, regulatory changes have increased administrative costs and funding requirements for employers who sponsor defined benefit plans while granting tax-favored status to defined contribution plans. But while employer-sponsored defined contribution plans have clearly reshaped the retirement landscape, nearly a third of U.S. firms—including 70 percent of small businesses—do not offer a plan of any type. Employers, particularly small firms, face multiple potential barriers or even disincentives to offering a retirement plan, including cost, complexity, and concerns about liability.
In a recent Main Street Alliance-American Sustainable Business Council survey, more than half of small-business owners who did not offer a retirement plan listed cost as the largest obstacle. This finding is consistent over time; in the 2003 Employee Benefits Research Institute (EBRI) Small Employer Retirement Survey, “revenue is too uncertain/too low” and “costs too much to set up and administer” were the two most frequently listed reasons for not offering a plan by businesses with five to 100 full-time employees. Additionally, many employers in the EBRI survey suggested that positive financial changes such as an “increase in business profits” would make it more likely that they would offer a retirement plan. However the problem goes beyond employer reluctance to offer a plan. A significant number of Americans with employers who do offer a plan are not contributing.
In response to this lack of access and low participation, policymakers at all levels of government have proposed a variety of ways to help businesses and their workers save for retirement. For example, Illinois is implementing a statewide retirement savings program in which businesses with 25 or more employees will be required to automatically transfer a set amount from each employee’s pay to a Roth IRA, unless the employee decides not to participate in the program. The state of Washington created a public website to serve as an online marketplace for retirement plans designed for small employers. Other initiatives are being considered in California, Connecticut, Oregon, and Virginia; several other states have set up task forces to study the issue.
The retirement savings project at The Pew Charitable Trusts has begun to research these issues: Why are more employers not sponsoring retirement plans? What do they see as the benefits, challenges, and constraints of implementing a plan? Why are so many eligible employees not participating? What are the implications of newly proposed state policies for businesses, employees, and taxpayers?
Over the next several years, businesses across the nation will be directly affected by these and other challenges. Like state chambers of commerce, Pew believes that good data can inform good policy, and we hope our research can be a resource for your members.
John Scott directs The Pew Charitable Trusts’ retirement savings project.