Most Americans will rely on a combination of personal savings and employer-sponsored retirement benefits to fund their retirement years. These sources represent two of what are commonly known as the “three legs” of the retirement security stool; Social Security serves as the third. Though U.S. workers accumulate most of their personal retirement savings through workplace programs, such as defined benefit pensions and defined contribution 401(k)s, too many do not have access to these benefits. And many of those who do face significant impediments when trying to save for a secure retirement.
Today, many states and the federal government are looking at ways to increase retirement savings. Eight states have enacted legislation to help private sector workers put away more money for their later years.
Research shows, though, that even workers who have access to a plan often face obstacles—such as debt, other savings priorities, immediate financial needs, or a lack of confidence in their ability to choose investments wisely—that can discourage or interrupt participation.
A recent Pew chartbook shows that more than a third of 18- to 64-year-old private sector employees lack access to a workplace retirement plan. Access varies by a number of factors including age and generation, race and ethnicity, industry, and employment status. The analysis includes nonprofit workers but excludes the self-employed, agricultural workers, and members of the armed forces. Among the key points:
- Millennials, the youngest cohort in the workforce, are most likely to work for employers that do not offer plans; 45 percent of millennials lack access to a plan compared with 30 percent of baby boomers and 35 percent of Generation Xers.
- Hispanics fare worse than other racial and ethnic groups; Hispanics are 40 percent more likely than Asians and 72 percent more likely than whites to report working for employers that do not offer retirement plans.
- Workers in “lower hour industries”—defined by the federal Bureau of Labor Statistics to include retail trade; arts, entertainment, and recreation; and accommodation and food services—have significantly less access to workplace retirement plans; 45 percent of workers in lower hour industries lack access compared with 34 percent in higher hour industries.
- Part-time workers typically do not have access to employer-sponsored retirement savings plans; nearly 6 in 10—56 percent—of these workers lack access to a plan, compared with 31 percent of full-time workers.
The analysis shows that most workers participate if an employer-sponsored plan is offered. This varies, however, depending on whether employees work part time or full time, which can heavily influence eligibility. Overall, about 70 percent of workers join a plan if offered. Those working full time take up plans at nearly double the rates of part-time workers—75 versus 35 percent for defined contribution plans. The higher number of full-time versus part-time jobs with these benefits drives up the overall percentage. The discrepancy in takeup can be explained in part by eligibility. Many plans, for example, require a minimum number of hours worked before employees can participate. Almost three-quarters of part-time workers who do not participate—73 percent—say they are ineligible. Practically speaking, those workers do not have access to a plan, even though their employers offer one. Among full-time workers who do not take part, 44 percent rate affordability as their top concern.
When an employer contributes, 78 percent of full-time workers take up a retirement plan, compared with 61 percent when the employer does not contribute. The majority of employers that sponsor retirement plans do make contributions. Employers in higher hour industries are slightly more likely to contribute than in lower hour industries—82 versus 79 percent. Overall, however, employer contributions are the norm.
Unfortunately, taking part in a workplace defined contribution plan does not guarantee retirement security; most Americans have saved only modest sums. Although the number is pulled down by younger workers who have had less time to contribute, the median amount in a retirement savings account is only $22,000. That’s just $6,000 more than the median annual Social Security retirement benefit of $16,146. In fact, 40 percent of workers with defined contribution plans have saved less in total than the average annual Social Security retirement benefit.
Worse still, nearly a sixth of workers have borrowed against their retirement savings. Loans and distributions before retirement—known as account “leakage”—reduce savings and investment growth. About 16 percent of workers with defined contribution plans have taken out loans from their plan. Federal rules generally allow participants to take up to half of their plan balance as a loan. Unsurprisingly, that means the median loan amount rises as plan balances increase. Taking loans from a long-term retirement account may reflect that many Americans do not have much in the way of short-term savings. According to 2015 research by Pew, 41 percent of households report that they would not be able to cover a financial shock of $2,000.
Overall, more than a third of private sector workers lack access to an employer-sponsored retirement plan, which dramatically curtails their ability to save. Although it is promising that many join a plan when one is offered, participation alone does not ensure sufficient savings when coupled with low savings rates and borrowing. Taken together, these pressures mean the three-legged savings stool so critical to sufficient retiree savings too often remains wobbly.
John Scott directs Pew’s retirement savings project, and Andrew Blevins is a senior associate with the project.