Mind the (Coverage) Gap

Since the Pension Protection Act of 2006 was passed, we have, as an industry, made great strides in improving the defined contribution system, for those with access to a plan.

Employees at companies that offer a plan are more likely to enroll, participate in an auto-escalation program and invest in a diversified, age-appropriate investment option.

However, what about the workers that are left out of the system? According to a recent Gallup poll, 70% of respondents between the ages of 30 to 55 are worried about retirement success. Within that 70%, approximately 52% have saved less than $10,000 and 36% have no savings at all. For those with no savings, 73% do not have a plan offered through their employer.[1]    

Headlines frequently cite that more than half (half!) of all American workers do not have access to an employer-provided retirement plan.[2] Data from the Employee Benefit Research Institute (EBRI) suggests that the act of making a savings plan available—regardless of whether the employee participates—is the single most reliable indicator of retirement success.

Let’s define the magnitude of the problem. We believe that the frequently cited and aforementioned 50% statistic may be exaggerated. By excluding workers younger than 21 and older than 65, as well as part-time workers, the proportion of full-time private sector workers without access to a retirement plan at work falls from 51% to 39%.[3] Digging deeper, we see that one of the defining characteristics of this population is that they work for very small companies. For those without access to an employer-provided plan, 48% work for firms with fewer than 50 employees.[4]

This analysis is also a snapshot of a moment in time. According to EBRI, the private sector workforce comprises 91 million full-time, full-year employees between the ages of 21 to 64. Of this population, 35.6 million are not covered by a plan (i.e., 39% of 91 million)—17 million work for firms with fewer than 50 employees.[5]  

Dividing the population into four subsets provides a closer look. The subsets include those that: 

1. Had coverage at a prior employer, but do not today;

2. Do not have coverage today, but presumably will in the future;

3. Had coverage in the past, and presumably will again in the future;

4. Will never have access to an employer-provided plan.

Coincidentally, a reliable data set to explain the relative proportions of the four slices of this pie is not available. Surveys do not ask this sort of question nor do they broach the forward-looking aspect of “will have coverage in the future.” 

However, this analysis yields some valuable insights, especially when combined with another enormously important and widely misunderstood statistic about the American workforce—that we are, and have been for the better part of five decades, job-hoppers. In fact, the average job tenure of the private sector workforce has averaged around five years since the 1950s, even during the “Golden Age” of lifetime employment.[6]

[1] Gallup Economy and Personal Finance Poll, conducted April 3-6, 2014.

[2] Dow Jones MarketWatch, “Why 50% of Workers are Retirement Have-Nots,” July 23, 2013.

[3] Employee Benefit Research Institute, Issue Brief No. 378, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2011.”

[4] Ibid.

[5] Ibid.

[6] Employee Benefit Research Institute, “Myth Understandings,” May 9, 2014.       

If we imagine that pie again, but over a period of 10 years, two things happen: the pie gets bigger, and the relative size of the "never have coverage" slice gets smaller. As individuals transition from job to job within our dynamic economy, some leave large employers for very small employers, and experience an "episode of non-coverage." However, others leave small employers for larger ones, or alternatively, small employers grow larger and start offering a plan.

The first step towards solving a problem is admitting there is one, but it’s important to apply an objective perspective. A number of solutions have been proposed to address the uncovered worker - state level programs, the Obama Administration's myRA program[1], plus various Federal legislative proposals. These proposals have a laudable goal, one we share—expanding participation in retirement saving. However, each starts with different assumptions about the characteristics and demographics of the uncovered worker population, which can lead to unintended consequences.

Below, we propose guiding principles to consider as we begin to think about designing potential solutions:  

1. Improve non-employer-based solutions to connect episodes of non-coverage, linking multiple plans over an employee's career;

2. Adhere to the concepts behind higher savings levels (as opposed to low dollar caps) and connect to the concept of a percentage of pay and auto escalation;

3. Simplify investment decisions for the individual via a “quick path option” into qualified default investment alternatives (QDIAs), which would help the participant make better asset allocation decisions;

4. Maintain exposure to appropriately diversified market portfolios;

5. Insist that new designs operate and integrate seamlessly with existing designs - plans that can roll over to IRAs or a new employer’s plan. Removing obstacles is also important (e.g., signature guarantees) to mitigate disincentives for plan-to-plan rollovers.

Let’s put these principles in action: a young, aspiring chef takes her first job with a national chain restaurant and enrolls in the plan at 3% of pay and invests in a target-date fund with a high equity allocation. After a few years, she has the opportunity to work with an up-and-coming chef at a start-up restaurant: 20 tables, a small staff and no benefits. Thus, she enters into an episode of non-coverage. In a few years, if the restaurant fails, she may return to the national chain. If the restaurant succeeds, it may eventually add a plan. Either way, she has coverage again.

This vignette should inform how we can improve retirement plan coverage—the private sector workforce data suggest that our chef represents the experience of many employees. Programs designed exclusively for the "never have coverage" camp have certain characteristics—low savings rates, avoidance of market risk and a potential lack of interoperability with the rest of the existing retirement system.

Imagine, again, our chef moves to a state for her start-up role that offers a plan for small employers (e.g., something both California and Illinois are currently considering). She then accepts another start-up role in another state and now has multiple stranded accounts (her first 401(k), her California account and the new state's account). She is unable to consolidate them into a new employer's plan or an IRA. These constraints contribute to the risk of cash outs or lost accounts, as well as the cost of administering millions of small accounts trapped in a system not structured for rollovers. By following our guiding principles, our chef could roll each account into her new employer’s plan and build a significant balance. In our opinion, she would be dramatically less likely to cash out of her various plans.

Defined contribution is a foundation for U.S. retirement security—it is working, but there is room for improvement. We need to enhance our current programs and find coverage solutions that mind our coverage gap—primarily small businesses and the under-employed. Every American should have the opportunity to retire with confidence.


Drew Carrington, senior vice president, head of Institutional Defined Contribution in the U.S. for North America Advisory Services for Franklin Templeton Investments   

Yaqub Ahmed, senior vice president and head of Investment-Only Division-U.S. for North America Advisory Services for Franklin Templeton Investments   

Michael Doshier, vice president of Retirement Marketing for Franklin Templeton Investments  



This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the authors do not necessarily reflect the stance of Asset International or its affiliates.

Franklin Templeton Distributors, Inc., is a wholly owned subsidiary of Franklin Resources, Inc. [NYSE:BEN], a global investment management organization operating as Franklin Templeton Investments.

[1] myRA stands for “My Retirement Account”, a proposed retirement savings program backed by the U.S. Treasury, announced on January 28, 2014 by President Barack Obama.