Closing the Retirement Savings Gap: Employer Offerings vs. Workers’ Needs

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Employees working for larger companies may have several advantages when it comes to saving for retirement, as larger companies tend to provide more robust retirement benefit offerings than small companies. However, experts hope provisions of SECURE Act 2.0 will help level the playing field among companies of all sizes.

According to a new study, Stepping into the Future: Employers, Workers, and the Multigenerational Workforce, by nonprofit Transamerica Institute and its Transamerica Center for Retirement Studies, total household retirement savings is one of the strongest indicators of a worker’s retirement outlook. Workers’ estimated median total household retirement savings is $65,000. However, a retirement savings gap emerges when savings are examined by company size. Workers of small companies have total retirement savings of $36,000 compared with $69,000 among workers of medium companies and $115,000 for workers of large companies.

Employees expect to rely on diverse sources of retirement income. Workers of large and medium companies cite retirement income from 401(k)s, 403(bs) and IRAs, while those working for smaller companies expect to rely on income from continued work, the study found: 58% of employers offer a 401(k) or similar employee-funded retirement plan to their employees, including 52% that offer a 401(k) plan and 15% that offer another type of employee self-funded plan.

Employee-funded plans are more commonly offered by large and medium companies. Small companies are significantly more likely to indicate they do not offer any retirement benefits.

Among companies not offering a 401(k) or similar plan, 42% say they are likely to begin sponsoring a plan in the next two years and 54% say they would consider joining a pooled plan arrangement. Among those that are not likely to sponsor a plan in the next two years, the most often cited reasons are that they are not big enough, they are concerned about cost and their employees are not interested. Beginning in 2023, SECURE 2.0 makes it easier and more affordable for small businesses to adopt a qualified retirement plan, whether a stand-alone 401(k) or similar plan, or by joining a pooled plan, Transamerica said.

Part-time employees

Among employers offering a 401(k) or similar plan, 58% extend eligibility to part-time employees. Among those that don’t, 25% do not plan to do so in the future. The most often cited reasons include high turnover rates among part-time employees and concerns about cost. The SECURE Act of 2019 requires plan sponsors to extend eligibility to make deferrals to long-term, part-time workers who meet a reduced hours of service requirement over three consecutive years. Employers were required to start tracking these consecutive years of service beginning in 2021, thus long-term, part-time workers meeting this new requirement will first be eligible in 2024. The SECURE 2.0 Act of 2022 reduces the consecutive periods of service to two years, beginning with the 2023 tracking year, and extends the shortened rule to 403(b) plans.

Hardship withdrawals

A concerning percentage of workers are tapping into their retirement savings before they retire, according to the report: 37% of workers have taken a loan, early withdrawal or hardship withdrawal from their 401(k) or similar plan or IRA. Almost one in five workers (19%) have taken a loan and paid it back in full, while 10% have taken a loan and are paying it back, and 8% took a loan and were unable to pay it back.

The SECURE 2.0 Act provides an exception to the 10% early withdrawal penalty for emergency personal expenses of up to $1,000 beginning in 2024. The act also permits employers to allow plan participants to self-certify that a hardship withdrawal is being taken for one of seven safe harbor reasons and that the amount requested does not exceed the amount of the need.

Workers have saved only $5,000 in emergency savings, according to the report, with those working for large and medium companies reporting that they have saved more than those of smaller companies. About 16% of workers have no emergency savings at all. Beginning in 2024, SECURE 2.0 could help alleviate this concern by creating a Pension-Linked Emergency Savings Account for 401(k) plans that permits non-highly compensated employees to save for emergencies on a Roth basis, Transamerica noted. In addition, under the new law, withdrawals from retirement accounts that are emergency withdrawals meeting certain requirements will not be subject to the 10% early withdrawal penalty applicable to those under the age of 59.5.

“Expanding retirement plan coverage so that all workers can save for retirement in the workplace is imperative for improving retirement security,” the report said. “To accomplish this, the main area of focus must continue to be small companies that do not offer a plan. Another important area of focus for expanding coverage is extending plan eligibility to part-time workers so they can participate in plans offered by their employers – which is another area addressed by SECURE 2.0.”

Current plan sponsors should consult with their plan providers about SECURE 2.0 to learn about how the new law impacts their plans, including new features and compliance requirements, advised Transamerica. In addition, plan sponsors should ensure their employees are taking full advantage of available plan features, investment-related services, planning tools and educational resources.

“As much as plan sponsors are doing to help employees save and invest, the survey finds they can do more to support employees who are transitioning into retirement,” said Transamerica.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.