John Scott is director of the Retirement Savings Project at the Pew Charitable Trusts. He leads a team producing trusted data and clear analysis of the barriers to retirement savings in America and the policies aimed at eliminating those barriers. His research--on costs and fees, challenges facing small businesses, state retirement plans, and the overall dimensions of retirement security--is essential reading for anyone concerned about the growing number of Americans facing their older years without the income they need to be secure.
The views and opinions expressed in this interview do not necessarily represent the policies and positions of Guideline. The content of this interview is for informational purposes only, and should not be interpreted as tax, investment, financial, or other advice on behalf of Guideline.
Guideline: It seems like we’ve been talking about a retirement crisis for a decade or more, and I wonder if people are starting to feel jaded. It doesn’t seem like it’s unfolded. Has it unfolded? Are most of us blind to it, because we live in a working-age bubble, or an upper-middle class bubble?
Scott: I never use the term retirement crisis. That’s just a big political debate that has no grounding in reality or substance. The question is not whether we call it a retirement crisis, or even whether it’s growing or not. It’s just a fact that nearly a third of the workforce do not have access to a retirement plan at their jobs; whether or not that’s a crisis, we need to fix that. We have too many people who don’t have enough to retire in comfort, both now and, if the system continues with the holes it has, in the future. Let's figure out a way to help people now, and to get people into the system for the future.
Giving people access to retirement plans and helping people to save more in their retirement plans is part of the solution, though we should also remember that fixing the front end of the system fixes a certain set of problems for a certain group of people.
But that doesn’t have anything to do with all of the people who are about to turn 65 who have, say, $87,000 in their combined 401(k). We don't have a solution for those who will run out of money.
And that problem is very hard to see. We do have Medicare and Social Security, which really provides a bedrock underneath most Americans. Still about 9% are in poverty. Then, there are a lot of older people who are just above the poverty line who could easily slip back.
Guideline: When you're looking at retirement in America, what else do you worry about?
Scott: There’s a lot that’s hidden in the retirement world. We still don't know what the 401(k) world is going to look like. A little under half of retirees are still receiving a pension benefit, a traditional pension.
Guideline: That’s surprising. I would have guessed a lower number.
Scott: Most people would. Our system still includes a large component of pensions. But it will change: Today no more than 10-15% of workers are participating in a traditional pension. More people are participating in 401(k)s than they did decades ago. But I fear many people will be reaching retirement having participated in a 401(k) for only a fraction of their working lives. The median account balances that we’re seeing as people reach retirement age, of $120,000, aren’t going to be enough.
Guideline: You recently released a survey and report on the barriers small businesses face if they want to offer retirement plans for their employees. Cost shows up as the biggest barrier. Can you unpack that for us? Do small business owners worry about startup costs or ongoing costs?
Scott: Based on the focus groups we get as well as the survey, it's the startup costs. That could be because it’s a concrete number. Many employers don’t understand the ongoing costs, which are not very clear or transparent. Separately, our research shows businesses don’t understand the fees they’re paying overall. Meanwhile, they’re not aware of the tax credits that can offset those costs.
Some small businesses may think of the cost as an expense. But unless you know to claim the cost as a credit, you might not know the startup cost comes right off the top-line tax liability.
Guideline: How could you help increase awareness?
Scott: The tax credit is currently $500. One idea is to increase the tax credit to the level of a typical startup fee, and have the provider help the small business claim it, either over one year or two. So that the tax credit would increase to say, $1,200. That would remove the uncertainty a small business owner feels, and the barrier. But at the end of the day, it's just education and outreach.
Guideline: Guideline’s founders started the company because they thought the small business market was underserved. Do you agree with that?
Scott: Most retirement plan products aren't really designed to appeal to small business owners. And part of that is cost. Total plan costs, including ongoing and startup costs, are typically two to three times higher than say, mid to large employers.
Guideline: Who typically pays the costs?
Scott: There are two kinds of costs: for record-keeping, or maintaining the plan, and costs for managing investments. Probably in most cases, they are passed on to the employee. In some cases, employers pay the record-keeping costs.
Guideline: Are there other things small businesses are uncertain about?
Scott: The number two reason in our survey was people didn't have the administrative bandwidth or resources. But I think what that might translate to is that they don't understand 401(k) plans. I think health insurance is a lot more straightforward. You pay an annual premium, you get coverage, you know, here are the deductibles and the limitations.
Guideline: For the employer, you mean.
Scott: For the employer. Based on some focus groups we’ve done, small business owners tend to be more enthusiastic if they’ve had prior experience with the 401(k), like in a corporate job, before they start their own business. Those that didn't really sort of struggled with some of the concepts we were talking about.
Guideline: What have been some of the surprises in your work?
Scott: There is a little mom and pop grocery store in Washington, DC. It’s all natural food, owned by people who care about providing great benefits for their employees. But their employees, who tend to be young, aren’t demanding retirement plans. They’re worried about healthcare, and they're worried about their student loans.
Guideline: So in some cases, the issue is that the retirement isn’t a priority from the employees.
Scott. In our research, that was number three in terms of their barriers. “We're not hearing from employees who want this.” It was 17%. You know, employees, especially young employees, sort of get it. My sense is that most would save something if they could.
Guideline: Do you have insights into how small employers are reacting to the new state mandates and auto-IRA programs being offered in states like Oregon, California and Illinois?
Scott: I know that Guideline’s clients use an integrated payroll to seamlessly process payroll contributions. But I talked to staff administering plans for the states, who noted that the biggest way to tell if an employer doesn't have a retirement plan in a state, is that they process their payroll by hand. What we are learning is that signup may not be as simple as clicking in your own piece of software. There are four steps, for instance, in Oregon’s state plan. Where you register your company, you enroll your workers, you upload a data file that has the name of the workers and their SSN's and that stuff and then it's the payroll.
But the market is adapting to make things easier. QuickBooks came out with sort of a tutorial or FAQ on how to process payroll for the state plans.
Guideline: What would you say to a small business on the cusp of offering a plan?
Scott: One thing really impressed me at the eight focus groups we did with small employers around the country. There were people there that were diehard anti-government, like the libertarian types. There were others that were progressive. But almost all of them said, "I care about the people I work with. I see them every day. And I want them to have enough to retire.”
So what I would tell those employers who care is that offering a retirement plan is a way to really help your employees without adding a lot of burden to your business. They are much easier to operate now, the fund options have gotten better, and the prices have come down.
So whether it's a state plan or a basic 401(k) plan, there's a lot you can do, both for yourself as an owner, but really for your workers. It really helps people out a lot.