A New Retirement Plan for Millions of Americans Ready for Something Different

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U.S. career professionals expect better from their 401(k) plans. But they’re not getting it.


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Americans are starting to take a closer look at their 401(k) plans and they see plenty of room for improvement – if not a better alternative.

That’s not exactly surprising, as the venerable 401(k) plan is showing signs of wear and tear 45 years after being enacted via the Revenue Act of 1978.

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Exhibit A is a new study out from Icon, the San Francisco retirement-solutions provider, that shows U.S. workers are “deeply frustrated” with their 401(k) plans.

These days “employees want personalization, simplification and most of all: seamless portability. In fact, lack of 401(k) portability and the dreaded rollover is the biggest source of friction,” the Icon Savings Plan report noted.

The Icon report noted that as far as employer-sponsored retirement plans go, the working world has “entered the era of “employee-centric” retirement benefits.

This from the study . . .

92% of employees want their retirement plans to travel with them from job to job without a rollover or change in plan.

80% of respondents (55% in 2020) would prefer a discretionary cash bonus to be used for other financial wellness priorities instead of a 401(k) match.

80% want their savings invested in a portfolio tailored to their needs.

78% want access to emergency savings that’s accessed through their retirement plan

Moreover, job shifting continues to be a point of failure for traditional 401(k) plans.

“With over $100 billion cashed out every year, and another $1.3 trillion in lost accounts, it’s not surprising that employees are unhappy with the current offerings or that the median retirement savings balance is $2,500,” the report stated.

Add to the mix that just 10% of small and medium plans offer a 401(k) plan and that high costs, regulatory complexity, and fiduciary requirements discourage companies from offering retirement plans to employees, and it’s no surprise that 81 million U.S. workers don’t have access to a retirement plan, according to Icon.

Why Are So Many Going Without Retirement Plans?

Why are so many Americans without a retirement savings plan and why are so many workers souring on 401(k)s? Multiple reasons, retirement savings experts say.

“We regularly ask our prospects and clients why they never participated in previous employer-sponsored plans,” said Tallou Financial Services Founder Ron Tallou.

“Typically, they say it’s because they knew they would not be there long enough and they didn’t think it would be worth starting up if they could not stay contributing to their plan.”

Another big issue is 401(k) rollovers, which retirement savers either ignore when switching jobs or don’t understand.

“Often, we see investors cash out their 401k and IRA plans when leaving an employer,” Tallou noted. “That’s not because they needed the money, but because they left and weren’t familiar with rollover rules.”

Additionally, many employees rarely maximize their retirement-plan contributions, which means they are leaving a lot of money on the table.

“A 2022 study on the employee participation in Bank of America’s benefit programs showed that 58% of eligible employees participated in a 401(k) plan — which was an improvement over previous years,” said Supermoney.com Managing Editor Andrew Latham. “Yet 61% of them contributed below $5,000 last year.”

“In fact, less than 10% of participants’ contributions reached the IRS maximum on elective deferrals, $19,500,” Latham added.

Portability a Top Priority for 401(k) Holders

Whether it’s a nomadic young career professional or an independent contractor who’s juggling several clients, a retirement plan with portability is becoming a top priority.

That’s why companies like Icon are rolling out a new type of employer plan called “portable retirement” plans.

Portable retirement plans are akin to the traditional 401(k) plan, but with a few critical differences.

Like a 401(k) plan, portable plans offer workers a low-cost, user-friendly, and tax-advantaged employer-sponsored retirement savings option. Unlike 401(k) plans, any American adult qualifies for a portable plan, including full-time salaried workers, part-time employees, and freelance professionals.

And critically important: Portable plans never require a rollover when a worker changes jobs or when a worker moves from a salaried position to become an independent contractor.

“It’s the only plan that travels with the saver from job to job without having to change your investments or your plan,” said Icon Chief Executive Laurie Rowley. “The plans prioritize the needs of the saver and deliver radical simplification to employers.”

A portable retirement plan’s biggest benefit compared with traditional 401(k)s is that they provide workers with more control of their retirement accounts. (These portables are also known as “blue-collar 401(k)s” due to their appeal to Main Street employees working traditional 9-to-5 jobs who frequently change jobs.)

“Under an IRA or Roth, your investment choices are endless, unlike 401(k) plans that only offer what the investment managing company makes available to you,” Tallou told TheStreet. “In many cases, employees don’t like the limited options they’re given or they don’t approve of the investment provider.”

In those scenarios, more employees are asking Tallou if they can be moved to another retirement plan. That’s where a new-age self-managed and portable retirement plan comes into play.

“Under a self-managed plan they would be able to move their money to any fund from any fund family they like as they see fit,” Tallou said. “Additionally, if the self-directed plan is in a Roth IRA, plan holders can access liquidity to their contributions they otherwise wouldn’t have in a 401(k) plan.”

Portable retirement plans offer several features that may attract the burgeoning number of U.S. independent contractors, 70 million strong. These features include the ability to receive direct cash payments rather than company matching, easier portability for workers who change jobs frequently, and emergency cash options.

“These plans may be particularly beneficial for independent contractors, who often don’t have access to traditional 401(k) plans,” Latham said. “However, it remains to be seen how effective these new 401(k) plans will be at addressing the retirement savings needs of disenchanted employees looking for 401(k) alternatives.”

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