Transitioning to a new job, whether it’s part-time or in a new field, can be an exhausting switch. This rings even truer when it comes to older workers, who oftentimes find themselves without health care and retirement savings benefits.
According to the Center for Retirement Research (CRR) at Boston College, the number of working elder employees without health care coverage or retirement savings benefits has risen to almost 20%, a 5% increase from the 15% of older workers in the mid 1990s.
Notably linked to the gig economy—where workplace benefits are mainly unheard of—are Millennials. A Prudential study found it’s this younger age group who agrees “traditional full-time employment will largely disappear, and freelancers will make 75% or more of the U.S. workforce.” However, some experts believe older workers, those closer to the Generation X and Baby Boomer group, are quickly catching up.
“Although we think of this being the younger workers’ game, I think older workers are more likely to do it,” notes Geoffrey Sanzenbacher, author of the CRR study and associate professor at the Boston College Department of Economics.
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The Current Population Survey (CPS), administered by the Census Bureau and also utilized throughout the CRR report, shows older employees tend to work in nontraditional fields including part-time, contracting, and freelance work at a higher rate than younger employees. The main reason for that, says Sanzenbacher, is independent contracting. While large startups such as Uber, Lyft and TaskRabbit have extensively employed freelance labor, Sanzenbacher argues that only a small fraction of these jobs make up the gig economy.
“The biggest one is independent contracting, and I think that’s where older workers tend to show up,” he explains. “They leverage the knowledge they’ve built over their careers.”
These independent contractors transition their careers to move towards retirement, or at times, free up time to take care for a sick loved one. Because health care benefits and retirement savings are widely inaccessible when it comes to freelance and contracting work, most workers are faced to pay high premiums associated with individual health care, or simply go without it.
“For people younger than age 65, if you’re not working, health care costs are the most expensive,” says Fredrik Axsater, head of Strategic Business Segments at Wells Fargo.
Under the Affordable Care Act (ACA), insurers are allowed to determine health insurance premiums based on the age of the policyholder. Even with a federal regulation allowing for caps on maximum prices, health care bills are one of the most expensive costs piled onto workers. “Some of those incremental costs come later in life, and traditional defined contribution [DC] plans haven’t really addressed longevity risk,” adds Axsater.
Even as independent contractors are unlikely to participate in a workplace retirement plan, other retirement savings solutions are available to this crowd of workers. Individual retirement accounts (IRAs), including SEP or SIMPLE IRAs, are widely popular among those without employer-sponsored 401(k)s, and are efficient too, Sanzenbacher notes.
Yet, while it’s relatively easy to sign up for an IRA, most workers rarely take action due to a lack of knowledge on the subject. Finding a suitable provider, completing multiple forms and selecting investment funds is a challenge to those unacquainted with retirement semantics. All the above services are already offered to those with an employer-sponsored plan—and at some companies, with the option of meeting with a financial adviser too. Self-employed workers aren’t given that option.
“People don’t regularly do these things. That’s hard for someone where this isn’t their job,” Sanzenbacher voices.
Plan sponsor actions
For workers in a contracting position at a company, Axsater suggests employers take steps to ensure all employees have access to a retirement plan. For example, plan sponsors may want to think about implementing a smaller retirement plan for these workers, in order to offset costs while still providing a benefit.
Employers unable to provide a retirement plan or health care benefit to contract workers can suggest providers who offer 401(k)s, without endorsing the companies, Sanzenbacher says. While plan sponsors do risk legal pursuit if they endorse a provider, distributing 401(k) forms from several providers could be helpful to workers without adding a threat of litigation.
“Just having some 401(k) forms from providers in the office could be helpful,” he explains. “It eliminates that first step of reaching out for people. If they can’t offer the benefit, at least providing the open material is a step.”
As more freelancers’ transition into a digital nomad landscape, some employers would be hard-pressed to find any of these workers in the office. For this, Sanzenbacher proposes adding reminders in emails, with links to different options, without endorsing the provider.
Future steps to increase retirement plan participation
Both Sanzenbacher and Axsater agree about how state and federal involvement can greatly shift the current issue, especially for older workers without coverage. In July, California implemented the CalSavers State-Run Retirement Plan, opened to companies with five or more workers including those self-employed. In 2018, Oregon added OregonSaves, an automatic IRA program that has seen success with 62% of eligible workers participating in the program. Additionally, 93% of those contributing participants had not changed their default deferral rate of 5%.
“I applaud some of the state’s plans for taking action to enable access to more people, and I think that’s a big step in the right direction,” Axsater praises. “This should be done at the federal level.”
Sanzenbacher argues that the responsibility should not solely be directed at plan sponsors. Even though there are actions employers can take to increase participation among self-employed workers, there is only so much they can do. Third-party platforms, which have been studied by the Center of Retirement Research at Boston College, can be the next step to improve overall retirement plan participation. The platforms would automatically create retirement plan accounts for workers at the start of their career and follow them to each employment opportunity. Instead of the plan being associated with the employer, it’s connected to the employee.
“We need to get more creative in this society about this, because right now, my only answer is a super unsatisfactory answer,” he says. “It would be nice if I could say employers can point their workers to this platform where they already have an account and remind them to save, instead of having to give someone a form and ask them to hopefully fill it out.”
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