Right now the green-tinted pearly gates to retirement belong to a privileged class: those who had conversion experiences and began to save the first time they saw a compound interest chart or those who simply had access to workplace retirement plans, quietly retrieving deposits out of the paycheck and largely going unnoticed.
Since we can't manipulate human minds yet (I think Big Tech is working on it as we speak), we must hang our hopes on workplace retirement plans. Sadly, they are largely missing from small businesses, but that may change soon.
State Rep. Les Warren, R-Hot Springs, wants to make access to retirement plans easier for small Arkansas businesses to help owners and their employees save during their working years. His motivation is clear.
"There are too many people retiring without having put enough money back for that time. They retire and then find out they cannot survive on Social Security alone," Warren said. That's why he has proposed House Bill 1349, The Every Arkansan Retirement Plan Opportunity Act, that will give us a fighting chance to fix the problem of access to workplace retirement plans in Arkansas.
The bill is not the silver bullet for solving our retirement crisis. But "access" alone will take us pretty far. A collection of retirement studies concludes that without access to a retirement plan, most employees at a business will not save for retirement.
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A 2017 Wharton study (https://whr.tn/2YyQY1H) made the case for state-sponsored employer plans, citing findings from the Employee Benefits Research Institute that a little over 60% of employees with such access had more than $25,000 in retirement savings, and 35% had more than $100,000. The numbers without access were grim: 87% with less than $25,000, and only 5% with $100,000 or more.
Not sure if you have been to the retirement lot for a test drive, but I can tell you the MSRP can be a lot higher than $25,000. It is the very definition of "sticker shock." There is no negotiation, and the financing options (reverse mortgages) are limited and can be predatory.
Roughly half of employees don't have access to retirement plans across the country, and according to research by AARP, 530,000 Arkansans find themselves in just that spot.
Starting a retirement plan is hard for businesses. According to the same Wharton study, that's why 70% of companies with more than 1,000 employees have them compared with less than 28% of companies with fewer than 50 employees.
Let's say you own a sign company. You have a half-dozen talented designers, office staff and salespeople working for you. You care about your employees but start to notice a problem. Nothing is happening for their retirement. So, you look into starting a plan.
Here are your questions: Who will be the trustee of the plan? Will you take on the fiduciary responsibility, or will you pay a 3(38) adviser to take it? Which record keeper will you choose, and do they integrate with your payroll? Who will do your third-party administration? Will you do an employer safe-harbor match or nonelective contribution, or maybe a profit-sharing contribution? If the latter, what vesting schedule do you want? Who will file your Form 5500?
If you dozed off reading the previous paragraph, then welcome to the world of retirement plans. They are complicated and expensive and burden the employer with fiduciary obligations that they may not understand or feel comfortable having. It's no surprise that an AARP survey of small businesses found only about 1 in 6 offer a retirement savings plan.
Enter the The Every Arkansan Retirement Plan Opportunity Act (https://bit.ly/3tg61vo), a Multi Employer Plan that's a public-private partnership allowing small businesses to enroll employees in a state-sponsored 401(k) plan. It is a simple nudge -- the state saying to small businesses, "Here you go. We have cut through all the complication and red tape.
The bill proposes a brilliant plan design. When an employer joins the Multi Employer Plan, all employees will be auto-enrolled at 5%, then have their savings increased annually by 1% until they reach a 10% goal. Employees will still have the choice to opt out or choose a higher savings rate, but studies of auto-enroll and auto-escalate in the private sector show that many will just let the savings roll. Get those green retirement gates shining! There's gonna be a crowd.
I interviewed Katie Selenski, head of California's CalSavers auto-IRA workplace savings program. Their plan is a little different in design and also goes a step further to mandate that employers with five or more employees but no retirement plan adopt a CalSavers plan. Selenski said the plan has enrolled more than a quarter-million workers. They have 70% employee participation and a 5.1% average savings rate. The median income of the participants? $25,000. Whoa.
You can read CalSavers' latest monthly report at https://bit.ly/2YAR9tu.
Arkansas Treasurer Dennis Milligan is excited by the notion of generations of Arkansans being able to retire on their own terms, but also the ability for small businesses to provide a much-needed benefit to their employees and for recruitment.
"I am supportive of Rep. Warren's bill because it levels the playing field for small business owners and their employees," Milligan said. "It also prevents a future dependence upon government assistance and gives people independence in their retirement days. It's a win for the state, a win for small businesses and a win for all employees."
But it's not all rainbows and sunshine. That sign company we made up is actually a real company called Archway Graphic Designs, and against all odds, owners Teresa Baker and Bart Lusk made complicated plan decisions and paid (and continue to pay) out-of-pocket thousands of dollars in administrative fees and fiduciary outsourcing. Since HB1349 would limit participation to employers who don't have plans, they and the minority of other businesses that started plans at great cost of time and money will not be able to join. I imagine, however, that that's a pretty easy fix to an otherwise great bill.
Thank you, Rep. Warren. Arkansas, let's make this happen.
Sarah Catherine Gutierrez is founder, partner and CEO of Aptus Financial in Little Rock. She is also author of the book "But First, Save 10: The One Simple Money Move That Will Change Your Life," published by Et Alia Press. Contact her at sc@aptusfinancial.com.