How One City Is Trying To Help Workers Build Retirement Wealth
Written by
Brooke Barley
Edited by
Zuri Anderson
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According to Gallup, four out of 10 Americans do not have money in any sort of retirement account. This leaves a significant amount of people without any money once they stop working.
The city of Philadelphia is trying to help its residents without retirement savings through a new program called PhillySaves. CPA Practice Advisor reported that the plan would work by automatically enrolling employees without 401(k) plans into a city-managed plan that would be funded through payroll deductions. The plan would follow the employee to any other jobs they had, as well. The plan would take 3% to 6% of employees’ paychecks, though they could change the contribution or opt out whenever they wanted.
This is not a new phenomenon; 20 other states have programs like this one for employees without an employer-sponsored retirement plan. Should this become more of a universal approach for the country’s workforce? Or, are there caveats we’re missing?
GOBankingRates reached out to experts to find out more.
Pro: More Employees Could Have Retirement Funds
Jason Vaught is the director of content and marketing at SmashBrand and said that Philadelphia could fill a “vital financial gap” for employees wanting to save more for retirement. Vaught added that can only be the outcome if the plan is rolled out in a way that’s easy for the employees to take part.
“The establishment of these types of programs is successful when there is an automatic enrollment option, easy-to-establish contribution methods, and little to no administrative burden associated with administering these programs,” he explained. “My experience indicates that providing workers with clear communications and reducing the amount of friction associated with establishing these types of programs will produce employee participation rates that exceed 75%.”
Pro: It Could Reduce Employee Turnover
The lack of retirement plan might have been a reason employees jumped ship before. With retirement savings taking place, Vaught said more employees might stay with the company, strengthening the city’s finances.
“When employers reduce employee turnover and workers build predictable savings through a city-backed retirement savings plan, cities are positively impacted as the local economy becomes stronger,” Vaught said.
Con: It Lowers Employee Wages
The contributions to the retirement plan do come out of employees’ paychecks. Denise Supplee, the co-founder of the Spark Rental Coinvesting Club, said this could be seen as unappealing to Philadelphia workers.
“The truth of the matter is that there are many lower-income Philadelphians who are struggling just to cover rent, groceries, utilities, and rising living costs. A payroll deduction can feel less like empowerment and more like another financial burden,” according to Supplee. “I believe most will end up opting out of the program.”
Con: Small Businesses Have To Take on More
Though the plans don’t cost small businesses to provide, having to offer the plan might take away focus from the business at hand. Mike Bowman, technical product manager and lead editor at Patio Productions, said that having to administer this plan could affect business operations.
“This proposed legislation requires business owners to administer these plans at no cost, adding another obstacle to remove friction in business operations and diverting the focus of executive management staff from product development and service standards, to administering a government-created savings program,” Bowman said, adding that this could lead to lower wages and fewer employees on staff.
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