Retirement in the U.S. – Pensions, SECURE 2.0 Act, Student Loans, and More

Gene Marks:

Hey everybody, it's Gene Marks again, and thank you so much for joining me on the Paychex THRIVE Podcast. I am thrilled to have John Scott with me. John is the Director of Pew Charitable Trust Retirement Savings Project. John, did I get that right first of all?

John Scott:

Yes, that's absolutely correct.

Gene Marks:

I am glad to hear that. That is good. I am never very good with titles. So, the Director of Pew's Retirement Savings Project, tell us what that is all about.

John Scott:

Yeah, I could probably spend the whole podcast talking about that, but let me break that apart a little bit by just saying Pew is a nonprofit nonpartisan policy research organization, which is a long way of saying we do a lot of research around public policy, different areas of policy, from healthcare, criminal justice system, the environment, and of course retirement savings. And in my role, I direct a project that's focused on expanding access to retirement savings opportunities for American workers.

Gene Marks:

All right, that makes complete sense. How do you get that job? Tell me, are you an economist by training, or what's your background?

John Scott:

Yeah, no, my background is a little convoluted, but it all led to Pew I would like to say in the sense that I started off in the retirement industry. I was a pension attorney for a number of years and worked in inside financial services firms. And then I took a job working for a trade association here in Washington, D.C. doing advocacy. And then I sort of had my midlife crisis and went back to grad school, got an advanced degree, did a little teaching and research. And when I got the job opportunity at Pew, it really combined all those aspects of the technical background on pensions, the research, and then the hands-on policy work. And so I brought all those skillsets to the job.

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Gene Marks:

That is awesome. And how long have you been at Pew so far?

John Scott:

Almost nine years.

Gene Marks:

No kidding. Wow. That's like a lifetime in today's world.

John Scott:

On some days, yes.

Gene Marks:

Okay. So you do research into retirement. By the way, I was talking to a friend of mine who works for a school district in New Jersey, and he's an Assistant Vice Principal. And he's going to retire in five years and he gets a pension, which for people listening and watching this podcast-

John Scott:

What's a pension?

Gene Marks:

Yeah, like what is a pension? Do companies still offer actual defined benefit pension plans anymore? Do you still see that out there among regular privately owned companies?

John Scott:

Yeah, you do. I think very large companies and obviously in the private sector like your friend, it's a little more prevalent. But it's a vanishing breed, really is.

Gene Marks:

Yeah. And it's vanishing because it's a fortune to fund. You're effectively saying we're going to promise you a pension payment, a benefit payment for all of eternity after you finish, retire with us. And people living longer and funding those liabilities are really, really big. Do you ever think anything like that could come back? I'm going to give you an example. I can actually see if you're a small business, you offer different types of retirement plans. And one can be like, well we're not going to give you full salary even 50% of your salary, but you come to work for us and if you work for us for 20 years and then you retire, we'll kick in X dollars a year, you'll get paid from us for 20 years after. That's something that probably could be, an actuary could probably figure out, could be an affordable thing. And do you think that that could ever happen? I'm really kind of curious being somebody in the world of retirement that you're in.

John Scott:

I think it really depends on the demand for that kind of benefit. I think if employers really see the value of it as a tool to attract and retain workers. My dad had a pension but he worked at the same place for 35 years. And so I just talked about my career. A lot of zigzagging, you don't really see that and it doesn't really lend itself to the defined benefit pension. But if you have a segment of the workforce that is a little bit longer tenured sort of like my dad, then I think it makes a lot more sense to reward that longevity.

Gene Marks:

Yeah, we're trying so hard to figure out. I'm going to ask you for your thoughts on numbers data if you have it on overall retirement crisis that this country's going for. But, we clearly have one. And right now if you're running a small business, John, the only retirement option benefit that we're providing to our employees is a 401(k) or something like that. And I was just thinking about my own business. I have 10 employees and I'm just thinking if I were to say to an employee, "Listen, you stay with me for 20 years and all is good, I will commit to X dollars for X years after you retire, in addition to what has been put away for your 401(k)," I wonder if someday that kind of option would come back. It would never be the pensions that we saw in the past.

John Scott:

No, definitely not. This is probably getting too far into the weeds, but there are programs out there for the companies can offer certain workers. They're called non-qualified retirement plans. And so, companies do make that kind of promise for certain employees. Usually management, but little bit more common. So you can totally see if the labor market changes and you're in an industry where experience is highly valued, certainly that kind of a promise that you make into your employees I think would have resonance and come back.

Gene Marks:

Yeah, it makes sense. And we won't go into any further detail on it, but one thing I do want to say is that there is a cash value defined benefit plan that very, very small companies could offer where the tax advantages are enormous. The only issue is that you have to contribute to this plan for all of your employees. But usually, I've seen that with some clients where it's maybe just a husband and wife that runs the company or it's very closely held. So, there is still some life breathing and defined benefit plans. But you're researching about retirement. We have a retirement crisis going. Tell me why we have a retirement crisis. Remind us all how bad this is.

John Scott:

Well, there are lots of statistics out there. Let me just point out a couple to illustrate the problem. So, according to the Federal Reserve, about one in four non-retired Americans have zero in retirement savings, absolutely nothing. And according to Vanguard, looking at their very large client base, the median amount saved for retirement is just over $35,000, which means half of their client base has $35,000 or less in retirement savings.

Gene Marks:

It's unbelievable by the way.

John Scott:

It's unbelievable. And so the biggest driver of that is the fact that people don't have access, consistent access to a retirement plan at their job. Now a lot of people will say, can't you just open up an IRA? You can go online and open an IRA today right now, it would take about 20 minutes. But the fact of the matter is people don't. Most of it's inertia, and the advantage of having workplace retirement benefits is that you save on a regular basis with every paycheck. You don't have to think about it. Unlike the IRA, you don't have to make a decision to send a check or do all that. It's all done for you and it just runs in the background and you live on what you have once the deduction takes place.

John Scott:

So, I think that's really the big challenge is that if an employer doesn't offer a retirement plan, and about half of U.S. employers don't offer retirement benefits. And I should say not that they don't want to. According to our research, most employers, the vast majority of employers want to offer retirement benefits, but they often find it very difficult to offer a retirement plan for their workers. We're not even talking like a defined benefit pension, we're talking about a 401k. It's just a little costly and there's a fair amount of work that an employer has to do. So I think that's really the big driver, is that lack of access.

Gene Marks:

So, this is completely unrelated to the fact that this is a Paychex podcast, but I just want to say that I had a retirement plan, I just switched retirement plans. I'm in the process of doing it. And I am going to actually be using Paychex's 401K because they do my payroll as well. And again, it's just coincidental honestly. And we're going to talk about Roth as well because I do want to get some of your thoughts on that if you have some. So I'm opening up a new 401K and a Roth and it's a pain in my neck.

There's so much paperwork I got to fill out, I got to explain it to the employees, we got to reeducate everybody on the investment shows. But it's for the best because I know it's a better plan. And again, I'm going to provide Roth plan as well. So I guess that's right, a lot of employers to do it just... But with so many people not having those retirement savings and you know it's weighing on a lot of people as well, it just seems like craziness. Yeah, a lot of things about running a business is a pain in the neck, but you got to do some of this stuff if you want to attract and retain workers, right?

John Scott:

Well, I think that's right and I think that's the rational intellectual comment, which is definitely true. But we know that from our research, retirement benefits aren't the first benefit that employers offer. It's as you would guess, health insurance, paid time off. Things that have an immediate value to the workers. People don't think about retirement or don't want to think about retirement, even though I think about retirement a lot. But it's something that it's sort of a little bit down the road. And so a lot of employers, they typically wait until they're a little bit bigger where attracting and retaining workers is much more important. They're much more successful, at least in terms of profitability. They feel like they can take on this additional responsibility. So, it does take a while and it takes some thought and effort as I think you've just illustrated.

Gene Marks:

Yeah, it definitely does. But it's super important. And in all honesty, other than the out-of-pocket cost for setting it up, which there are now tax credits available. So we'll get into that in a minute. There's no requirement that you contribute to or match your employees, it's just providing them with the availability that they can put money away for themselves and trying to educate them together. And one final thing I can also say to people listening or watching this that are running businesses, guys, I have so many clients that they've had long-term employees, they didn't put enough money away for retirement. John like you're saying, $35,000 is crazy. And then they want to retire and they can't. And then you've got the employer who has got to kick in.

Gene Marks:

You want to look after people, that's what we do. So, now we're like, we need to give this guy continue to employing him or give this person some extra money because you don't want them destitute. So, it does kind of fall back on the employer a lot of time, particularly if you're a smaller employer and you've got... So there's all that that's going on. Okay. So tell me about SECURE 2.0. We've done some other episodes on it. I love talking about this act because it got past sort of in a bit of a rush at the end of the year and then people are starting to unpack it and find different things in it and good stuff. Maybe not so good stuff. But tell me about SECURE 2.0, why you think it's important, what parts of it as somebody who covers retirement savings, why you think it's a good thing?

John Scott:

Well, I think it's a good thing overall, but from the perspective where I sit, and I'm very concerned about how do we expand access to retirement savings in this country. I don't think I mentioned the statistic, but about 47% of working Americans don't have access. That's roughly 57 million people. And so how does SECURE 2.0 help with that problem? It does lots of things, the bill is huge. But I would point out two things in particular that I think are really interesting. If they're done well, could have a big impact. One I think you mentioned earlier were the tax credits for businesses for starting up a plan. According to our research, the number one driver of employers not offering retirement benefits for the small to mid-size market is the cost of starting up a plan. And so if we can use those credits effectively, now there is a sort of question here about the timing. So, typically if you spend Jane $2,000 to set the plan and-

Gene Marks:

Which by the way was is pretty close to what I'm spending, but keep going.

John Scott:

But when do you get the tax credit? It could be several months because you have to file a tax return and processes and some business owners can't afford to wait that long. So, I think if we can sort of think about how to match up that expense with the timing of the credit, that would be really important. The other provision I'm very excited about, although a lot of people are trying to figure out how it's going to work in practice, is this expanded savers credit. So this is a tax credit that goes to low to moderate income people who have saved retirement and matches up to 50%, up to $2,000. So they would get a thousand dollars in terms of a tax credit.

John Scott:

And what the SECURE 2.0 act did was make it refundable. So instead of it just offsetting a tax liability, a lot of low to moderate income savers don't have any federal tax liability, it makes it refundable. So, they would get a direct payment. So it would in effect act as a matching contribution. And we know that when you have a matching contribution, participation rates go up. So, it has a two-for effect. Moderate income savers getting a little bit extra for what they're putting in, and it also encourages more workers to save for retirement. But again, devil's in the details about how that's going to roll out and how it's going to work in practice.

Gene Marks:

Yeah, that's a really exciting one as well. And obviously it only applies to certain people of a certain income level, like you said. It's moderate income or below. It's whatever they're putting away. It's basically the government basically saying, "You put money away in a 401(k) plan, we're going to match you with a tax credit." Which is great. A lot of people don't get their arms around that. And unfortunately, as a CPA, sometimes people don't use their own accountants or they do their tax. They don't realize that that stuff is available.

Gene Marks:

It's all awareness and education. You know what excites me is, tell me if you think... There's a provision in SECURE 2.0 which I think goes into effect this year, where employers that have less than 50 employees, when they match an employee's contribution up to I think a thousand dollars per employee, they get a tax credit, the employers do, which is huge. It's basically saying, dude, the government is going to pay you to match your employee's contribution. You don't have to worry about being out of pocket, you'll get it back in a tax credit. Did I describe that right?

John Scott:

Yeah, that's my understanding. And I think that could be very important. But again, I think it's, as you said, it's the education. This is the problem with tax credits in general is that a lot of times people don't know that they're entitled to them. Earned income tax credit is a great example of that. I think, was it one in four don't apply for it when they're eligible. Similar with the business tax credits, you have to have a good CPA or at least be very knowledgeable. And part of that's on the government to really advertise some of these new provisions and SECURE 2.0.

Gene Marks:

It's funny that there's certain things I'd love to do and I don't know if I'll have the time to do it. Someday when I retire, when I'm older, I would love to have just a nonprofit that gets external funding that would just help me do earned income tax credit filings for people. In Philly alone where I live, there was some statistic that like 70% of the people eligible for earned income tax credits aren't applying for it because they just don't know about it. And it would be like it's just money from the government that they would be able to use to feed their families.

John Scott:

I think with all of these, it's rewarding the kind of behavior that we want to see. With EITC, it's working for the employers. It's offering a plan or providing that match for the savers credit, it's actually saving. So, these are targeted tax credits. In some cases they've proven to work very well, like the EITC or the children's tax credit, so you can have a good effect, but really it's all about the implementation at this stage.

Gene Marks:

It really is. And again, there's plenty of good CPAs out there, but CPAs get paid for their time like any professional service. And a lot of times the people that can most benefit from the earned income tax credit aren't hiring CPAs to do their taxes.

John Scott:

Part of it is they don't know sometimes. They don't know a CPA can be helpful too. That's right.

Gene Marks:

That's a good point. Back to retirement savings. So in the SECURE 2.0 Act, I don't know if there's other parts of it that interest you. I love the matching of student loans as well. Tell me a little bit about that.

John Scott:

Well, I think that's has a great potential to really be helpful to employers with younger employees. Obviously we've been talking about student loans for several years now, and with good reason, they've just exploded. I have a daughter in college and she has student loans. Thankfully it's not as huge as some of these numbers we see out there, but I think it's really, again, encouraging the right kind of behavior. It's keeping people in the retirement plan while paying off their student loans. And so, I think that's a really nice message to send to younger people that you don't have to make a decision between should I save for retirement, should I pay off my student loans? You can do both. And retirement savings is really about the long term. It's saving over a 30 or 40 year career. And if you can just keep, especially younger people, keep them in the plan, then I think it's going to pay dividends for them and frankly for employers, I think it's going to be very helpful for employers in what is now a pretty tough job market.

Gene Marks:

Yeah, I agree. I think it's a great way to attract those workers and retain. I interviewed the CEO of a company called tuition.io recently. I'm writing this piece for the Philly Inquire about student loan options for employers. And he told me that he has a significant number of customers. Tuition.io is, they get in between the payroll services and the loan repayment services. So they automate repayment of loans through paychecks. And he was saying that a great percentage of their customers are older people because it's not just like the kids. A lot of times there's parents that get the student loans for their kids. So, it's these older people as well. They're paying back the student loans on behalf of their kid. They could very well be eligible to get that matching payment to their retirement accounts.

John Scott:

I know. It sounds crazy, but it is true. It really is true. So I focus on the younger people in the sense that this is a tool to help attract those workers starting off. And they're the ones oftentimes who don't save for retirement. We lose them a lot of times. But you're absolutely right, it really cuts across demographics.

Gene Marks:

Yeah, it really is a pretty interesting piece of data. Roth, I'd like to get a little bit of your thoughts on that. So, SECURE 2.0 now allows employers to contribute to Roth 401(k)s. For those people that don't know, if you're comfortable explaining what they are, by all means, if you'd like to, because we just started one and I'm absolutely thrilled about it.

John Scott:

No, go ahead. Go for it. I'd like to hear your story about that.

Gene Marks:

Yeah, well I can tell you what the story is because we have a lot of... I don't come up with any of this myself. I have clients coming to me saying we want to do this because it makes sense. And the Roth 401(k) in my company, we started it up, people could put money away after tax into a Roth 401(k) and now I can contribute to that for my employees as well thanks to SECURE 2.0, and it's all after tax money. So they've already paid the taxes on it. It's not a pre-tax thing. It doesn't reduce their taxable income like a regular 401(k). And a regular 401(k), you're just deferring it. When you put money into your 401(k), when you are required to take it out some years later, you're going to pay taxes on it then when you take it out. The Roth 401(k), you've already paid the taxes on.

Gene Marks:

So, as it grows, it grows completely tax-free. So, the idea is with the markets, I know stock markets are up a bit since the beginning of the year, but they're still off their highs and there's still a ways to go. And so I have a lot of clients coming to me and saying we want to stick some money in this Roth because we know the markets are going to go higher at some point. We don't know when, but we'll ride that tax-free and then when we pull the money out, we don't have to pay any taxes on it at all. That's the beauty of your Roth 401(k). Did I describe that right?

John Scott:

I believe so. I should say thinking about my employer that I'm not here to give any advice, or...

Gene Marks:

They should start one too, right?

John Scott:

Yeah. But I think really think though, it's a nice trend we're seeing in public policy where we're beginning to loosen things up a little bit. We're not having these rigid barriers between Roth or traditional IRAs or Roth accounts within 401(k)s. And I'm hoping that this trend continues both with portability. So, there are I think some restrictions still with rollovers from Roth, IRAs, for example. But I'm hoping that we'll have full portability. That's another issue that we don't often talk about is that people leave accounts behind because they can't roll them over or it's hard to roll over accounts. So, this general trend of allowing, in your case, the employer contributions to the Roth, that is huge. Because everybody's situation is different. You should be able to pick the right vehicle appropriate for your financial situation.

Gene Marks:

Makes sense.

John Scott:

That's the bottom line.

Gene Marks:

You've done research as well into state run retirement plans as well as what's being provided by federal. And there is a trend that more states are now requiring employers to do something about retirement. Tell me a little bit about that research and what you found.

John Scott:

Yeah, so it might be helpful just to really quick to say what these programs are. So they go by different names. Work and Save programs or Secure Choice programs. We call them at Pew Automated Savings Programs. But the basic idea is if you're an employee that works at a job that does not offer retirement benefits, you would be enrolled in a statewide savings program. It would be automatic enrollment, much like automatic enrollment in a 401(k) if people are familiar with that. And so you might start deferring at 5% of your pay. The program would set up an IRA for you, so this IRA, would be owned by you. You could opt out at any time as the employee, could change your contributions. Now what is a little bit different and makes it unique is that it's an IRA based program, but it's payroll based.

John Scott:

It does use automatic enrollment, but the employer is not really involved. So the employer's only responsibility is to facilitate payroll contributions. They don't have any say in the program. It's overseen by the state, but it's run by private financial firms, very similar to 529 college savings programs if you're familiar with that. So similar setup there. But these programs are now in 14 states where they've been passed in 14 states. There's seven that are up and running today. And just the quick data points. Approaching about 700,000 people are saving across those seven states.

John Scott:

And the assets are about 800 million, probably past 1 billion this year. So this is relatively new. The first program started in 2017 in Oregon, and as I said, now we're up to 14 states. We see more states probably passing legislation in the next year or two. So to finally answer your question, yes, we've done a lot of research around these because we do think these are pretty unique in the sense that the 529 college savings programs, those are voluntary. You sign up and start saving in an account, but this does use automatic enrollment. So it's using that power of inertia to get people into the savings system and keep them saving, and it's portable. So we've looked at, and I can go into details a little bit, but we've broadly taken a look at how does this impact businesses, how does it impact the workers, and what's in it from the taxpayers point of view?

Gene Marks:

Why wouldn't employers want this? To me it sounds kind like a no-brainer. When I look at these state plans, the employers don't have to do any work other than just facilitate the payroll contributions and then we're done. We have no fiduciary responsibility. We don't have to worry about setting anything up. We don't have to worry about evaluating new plans. Again, just the pain in the neck that I talked about earlier when you're setting up your own retirement plans as an employer, I'm kind of curious, what are the downsides or what are opponents of these plans say?

John Scott:

Well, I think there's a concern that it is a requirement, that businesses do have to do the payroll deduction if the employee stays in the program. Now we feel that, and I should say there's no fee for the employers. Really the only thing they have to do is the payroll deduction. And so there is a concern that, well, is the program going to become more onerous over time? So far that hasn't proven the case at all. There's another concern that somehow employers aren't going to adopt their own retirement plans and somehow it's going to compete with the private market. We've done some research there to look at the states that are up and running today, and we found that if anything, it's the reverse.

John Scott:

When a state implements one of these programs, it actually nudges employers who've been thinking about offering a retirement plan, 50% of employers don't offer a plan. The state comes in and says, "You have to start facilitating the contributions for these workers unless you have your own retirement plan." And for some employers, they're like, "You know what? I'd actually my own 401k. I'd like to offer contributions and choose the investment lineup, and I'm willing to do that." And so we actually see an uptick in new retirement plans in those states with these state automated savings programs.

Gene Marks:

That's fascinating, and it doesn't surprise me either. First of all, when you have your own retirement plan, you can make contributions to it too. So that's a benefit that you can use to attract employees. And my other concern is just the government taking my money. I don't know if there's any... it's a social security issue, although I think some of these state plans, the money gets invested with outside investment banks and institutions, right? It's not like going into the state coffers, but there is still that level of distrust.

John Scott:

Absolutely. That's why we say it's very much like these 529, which the 529 programs have been very successful now because they've been in existence for about 20 years or so. And so I think that's a good analogy to use. And I think that we certainly, I should say we are not against employers offering their own retirement plans. And frankly, if an employer can offer 401k with matching contributions, that's the best. But if they can't do it or they're not quite ready. At least the state programs offer a savings option. We did a survey of employers in the Oregon program and just to see how's it going for them? What are the pain points for them? And I remember one employer wrote in the survey, he said, "We can't afford a retirement plan and this is a great option that I can give our team until we're ready at that point to offer 401k." So it's really seen as a nice way to say to a worker, "We do have a retirement program and we can compete with that bigger company that has a 401k."

Gene Marks:

Great. John, before I let you go, what are you working on now and where do you see retirement, the whole move? What more can be done to solve this lack of retirement savings issues?

John Scott:

Well, I mentioned the savers match a little earlier from Secure 2.0, and we're really interested in seeing how that might be implemented. There are a lot of questions around that. Would people take it up? Would people file a tax return to get it, or how would it be communicated? And I think that's really, really important because if you can increase people's balances, that has a big impact on people's lives. So I think we're pretty focused on that. The other area, well, two other areas real quick are looking at two segments of the workforce.

John Scott:

One are contingent workers. We call them non-traditional workers. These are people that aren't in a traditional employee employer relationship. They often don't have that nexus with the HR system. So we're thinking about how to get those people into the retirement system on a regular basis. And they're also doing some work around wealth inequality. So understanding how communities of color, who we know typically don't have access to retirement benefits or other ways of building wealth. We're going to be doing some survey work around that and thinking about how can we better target some of these tools we've talked about to African-Americans, Hispanics, and other groups that are frankly underserved by the financial services community.

John Scott:

John Scott is the Director of Pew Charitable Trust Retirement Savings Project. John, thanks for all the great work that you guys are doing. It's just fascinating, and I hope it helps make a dent in what really is an enormous crisis in this country. So thank you for speaking with me. It was really, really great stuff.

John Scott:

Gene, thanks for having me. Appreciate it.

Gene Marks:

Everyone. You've been listening and watching to the Paychex Thrive Podcast. My name is Gene Marks. Hope you enjoyed this information. If you've got any advice or tips or would like to suggest guests to us, please visit us at our webpage at payx.me/thrivetopics. Thanks again for listening and or watching. We will see you again very soon. Take care.

Do you have a topic or a guest that you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR, payroll, benefits, or insurance services, see how Paychex can help. Visit the resource hub at paychex.com/worx. That's worx. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host Gene Marks, and thanks for joining us. Till next time, take care.

Speaker 3:

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