But what about those who can’t enroll in an industry-leading plan? Or in any plan?
• 2/3 of workers from 21-30 don’t have access to a plan, versus 3/4 of workers their parents’ age.
• Nearly all large corporations offer some sort of plan, but many smaller companies still do not – 60% of firms smaller than 25 employees.
• The smaller the plan, the less likely it is to offer “state of the art features" which are essential to bring the most benefit to the most employees.
And then there’s the modern phenomenon of workers who aren’t directly employed by any company. These include a wide range of self-employed “individual contributors” from dog-walkers to internet consultants, as well as millions of contract employees in more traditional corporate environments. The latter may spend years with one company without gaining (or for some, wanting) regular-employee status. Some of these people may never be eligible for a company-sponsored plan.
Small K, Solo K
Information technology, including complex online interfaces and financial transaction capabilities, and automated personalization, has made it much easier to bring many kinds of financial service down to the individual level cost-effectively. And a big industry driven by strong demand will naturally evolve to reach the largest possible population, crushing barriers that stand in the way.
How low can they go? These days more and more providers are offering cost-effective, quality plans for smaller employers. Outsourcing specialists for small and midsize companies like Paychex and ADP are leading contenders. Investment giants are also starting to get interested in this market, led by online pioneer Schwab, but also including mainstream firms like Franklin Templeton.
However, standard 401(k) still seems to hit the wall somewhere south of 25 employees, due to hefty administrative requirements – plan documents, IRS reporting, etc. – or the wrap fees charged by middlemen who take care of those issues. The SIMPLE 401(k) is largely a washout due to higher fees and limited flexibility. According to Jeanette LeBlanc of T. Rowe Price, “When we studied this option, we could not come up with a scenario where this would make sense to use.” The single-participant or “solo” 401(k) is a good option for sole proprietors, but significant responsibilities and required contributions kick in if the owner adds just one employee.
Other options may evolve. The Governor of Michigan, Jennifer Granholm, has proposed a state program to administer 401(k) plans for small businesses. Details are still sketchy, but odds are the plan would cover the administrative costs while the usual suspects provide the plans and manage the assets. The scheme is endorsed by the broadly bipartisan Asset Building Coalition for Michigan, whose director Eric Munschler offers an even more interesting proposal: “Can we agree to include a quality personal financial education as a required component of any new high school graduation standards?”
Advice for everyone? Not yet.
I heartily agree. Many Americans don’t know enough about even the very basics of investment. And in more ways than one, those individual and small-company workers are out there on their own. They don’t have the cafeteria meetings, education materials, and HR support that their big-company colleagues enjoy (although the benefits of those programs are often highly questionable). They don’t even have access to that well-known, industry-standard advice tool: the folks around the water cooler.
Fortunately, help is on the way. We’re beginning to see evidence of progressive plan features moving beyond the world of big corporate plans. According to the Profit Sharing Council of America (PSCA) annual survey for 2004, automatic enrollment of new employees is up to 10.5%, but still mostly in large plans. The numbers on investment advice are really encouraging: a whopping 56.6% of all plans now offer some kind of advice. Even starting from the top down, that covers a pretty broad spectrum of plans.
On the tiny-company side, even solo plans now allow personal loans just like their larger counterparts, and have recently been enhanced with higher contribution limits. Increasingly, I believe that the mix of retirement plan advice and advanced features will become a more important differentiator for companies looking to hire and retain the best talent – on the way to becoming absolutely standard. In the meantime, employees can and should ask for features like managed accounts.
The future, and beyond
There’s a bigger issue here than leveling the playing field between big companies and little ones. I have no doubt that the long-term shift toward self- funded, self-directed investment is the future of retirement. (For many people, if not most, it’s the reality right now.) If this truly will be the paradigm for the next generation or two, the K-style plans at the heart of the issue bear a responsibility to serve the American workforce. We’re counting on them to do two things: Be reasonably likely to build adequate savings, and reach the vast majority of workers.
Just a few years ago I couldn’t have said they succeed at either test. Now, thanks to the growth of automatic features, advice, and managed accounts, they’re getting closer to the first. Thanks to sheer demand, they’ve come much of the way toward the second. Going the “last mile” is always the hard part. But if we understand what the goal really is, with enough financial and technical ingenuity I think we can get there.