The 401(k) plan is a great way to save for retirement. But what happens if your employer doesn't offer one?
Strikingly, that's the case for the majority of workers in the private sector. Some 58 percent of workers ages 25 to 64 have no retirement plan at their current job, according to the Center for Retirement Research at Boston College. Traditional pension plans are declining, experts say, and many small firms offer no retirement plan at all. Even if firms do offer a retirement plan, some of their lower-wage workers struggle to participate, which leaves only Social Security for many to rely on.
"It's a looming crisis," says Ken Jacobs, chairman of the Center for Labor Research and Education at the University of California, Berkeley. "If the issue is ignored, more and more people will retire into economic hardship."
California and other state and local governments have begun trying to come up with solutions. The most far-reaching proposals call for creating a new retirement plan aimed at workers who currently lack one. These would provide a payout component, designed like a pension, to supply steady income in retirement that would last a lifetime.
California is already studying such a plan. Gov. Jerry Brown recently signed a law establishing the California Secure Choice Retirement Savings Trust. A feasibility study remains to be done, and a finalized plan would still need approval from the state Legislature.
Under the plan, California businesses with five or more employees that don't already offer a retirement plan would provide workers with access to a payroll-deduction system. Employees would kick in about 3 percent of salary on a pretax basis, with the funds pooled and invested by a board chaired by the state treasurer. The plan would provide a modest, guaranteed retirement income backed by a private insurer.
Employers would not have to contribute to the plan, and employers and taxpayers would incur no liability for it, says Greg Hayes, spokesman for California State Sen. Kevin de León (D), a primary sponsor of the legislation.
In New York City, Comptroller John Liu has expressed interest in a guaranteed retirement account plan. Among its components: Employees without a retirement plan would have to contribute, along with their employers, to a government-administered GRA. Participating employees would receive a $600 tax credit to offset their contributions.
The plan would use private-sector investment managers, and the government would guarantee an annual return of about 3 percent above inflation, adjusted to markets' performances. During bull market years, returns above 3 percent would go into a reserve fund that would support the guaranteed return during bear markets, says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research in New York, who originated the plan.
Earlier this year, Massachusetts passed legislation authorizing a state-administered 401(k)-type plan for employees of smaller nonprofit organizations. This limited-scope plan still needs approval from the Internal Revenue Service, however. It doesn't include a guaranteed payout for retirees.
On the federal level, Sen. Tom Harkin (D) of Iowa this summer published a report on a plan called Universal, Secure, and Adaptable Retirement Funds. Employers without another retirement plan would enroll their workers in an automatic payroll-deduction plan, overseen by a board of trustees but managed by private money managers. Employers would make a "modest" contribution. Low-wage workers would be eligible for a refundable retirement savings credit contributed to their account. Although there would be no legal guarantee on the payout benefit, Senator Harkin's report said that participants or their survivors would get "a benefit paid over the course of their retirement."
Experts note that the plan goes much further than the Automatic IRA proposal that has been floating around Washington and endorsed by President Obama, which would require employers with more than 10 workers to withhold and place 3 percent of workers' pay in an Individual Retirement Account.
Some business groups worry about the impact of the newer, broader plans on the private sector.
"There already are a lot of vehicles that help small employers set up retirement plans," says Lynn Dudley, senior vice president of policy at the American Benefits Council, a trade association for retirement and health-plan sponsors based in Washington. "We shouldn't just abandon those in favor of a new idea. Along with looking at new designs, we should refine those that exist already."
Already, any low- and middle-income taxpayer can contribute to a conventional or Roth IRA. These allow workers to shelter money from taxes either when they make the investment or pull the money out. Unlike Social Security, IRAs don't provide guaranteed income.
"The current retirement system … is inadequate," says Jim Davis, owner of Iowa Title & Realty Co. in Charles City, Iowa, who provides his three employees with a retirement plan. "Too many people are ill-prepared for retirement."