April 22, 2024

By John Donnelly, head of Capstone’s Financial Services Practice

We believe policies going into effect in 2025 will catalyze significant progress on the primary challenges facing worker participation in the retirement market, ultimately spurring efforts to focus on increasing plan access.

Lawmakers have focused on two primary shortcomings when trying to increase workplace retirement plan savings. First is improving access to plans for employees of small businesses. Only 53% of companies with 49 or fewer workers provided a workplace plan in 2023, compared to 91% of companies with 500 or more workers, according to the Bureau of Labor Statistics (BLS). The second challenge is getting more low-income employees to participate in available plans – according to BLS, 47% of the lowest 10% of earners participate in available plans compared to 91% of the top 10%, or even 70% of earners in the 25% – 50% percentile.

Studies have demonstrated a material difference between opting in versus opting out. The effect on retirement savings is particularly pronounced.

Studies have consistently shown significant inertia for individuals to amend the status quo for program participation. Whether dealing with privacy considerations, COVID-19 surveillance, or organ donation, studies have demonstrated a material difference between opting in versus opting out. The effect on retirement savings is particularly pronounced.

Based on actual retirement plan data, Vanguard’s “How America Saves” report from 2023 found that the participation rate for workers earning less than $15,000 was 28% with voluntary enrollment and 80% with automatic enrollment. Similarly, the participation rate for workers earning $15,000 – $29,999 was 39% for voluntary plans and 85% with automatic enrollment. Overall, the participation rate was 70% with voluntary enrollment plans and 93% for automatic enrollment.

Beginning in 2025, new plans (created since SECURE 2.0 passed at the end of 2022) must include automatic enrollment. Department of Labor data shows that roughly 8% of workplace retirement plans are new in any given year, which skews towards a higher percentage of new plans for small employers. Over time, we expect the 75% national take-up rate (the share of workers participating in available plans) will steadily approach 90%. Combined with the current 70% access rate, according to BLS, that would increase the overall participation rate from 53% to 63%.

If the enrollment issue is substantively solved, efforts fully turn to the 30% of workers who do not currently have plan access. Congress has tried to solve this by introducing small business tax credits with the 2019 SECURE Act and then expanding them in the 2022 SECURE 2.0 Act. However, a Boston College study found that only 24% of businesses with 100 or fewer employees were aware of the tax credits in 2023, even though 78% of those said the credits would make them more likely to offer a plan.

Within five years, we believe mandated workplace retirement plans will have near unanimous Democrat support and could realistically pass.

Given this challenge and potentially higher employee plan costs from more participants, Congressional Democrats increasingly support mandating workplace retirement plan coverage. Five years ago, the idea was far-fetched. Now, we believe the solution is the consensus party solution. Within five years, we believe mandated workplace retirement plans will have near unanimous Democrat support and could realistically pass, particularly under a united government.

These developments could transform the retirement ecosystem, with implications for investors and companies alike. Capstone will closely monitor the progress, promises, opportunities, and risks for our clients.  

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