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Rethinking 401k auto-enrollment II

Rethinking 401k auto-enrollment II

| May 27, 2024

Continuing from my post last night, the 401k Geek dinner generated a few more suggestions on how to improve 401k auto-enrollment. I ruminated on these while working in the yard today and offer these pedestrian thoughts.

The dinner attendees rightly pointed out the lack of retirement plan options for gig workers (ie, ride-share drivers) as well as those in the cannabis industry. Might encouraging the drivers to contribute $1 of each ride to a retirement plan help? That certainly could help albeit this type of retirement plan would need to have extremely low fees/ rely heavily on AI. One of my 401k providers charges $40 per year as a participant fee. The fee covers such services as call center access and printing and mailing statements. It would take a driver 40 rides just to cover that fee! And what do we make of the fact that only 30% of ride-share riders tip/ the financial impact to the driver?

The point is taken though. Some side-hustles can generate a fair amount of income which can lead to a SoloK. But for side-hustles that rely on volume (i.e., ride-sharing), a SoloK is likely not feasible. My mind also drifts towards how to automatically set up a retirement account for the drivers. The ride-sharing companies would likely not want to be involved as the drivers are contractors paid by 1099.

I am also pondering how to best educate the gig workers that it is in their best interest to be self-reliant and not depend on the government in retirement. In spite of my grades in tax back at university, I can say with 78% probability (!) that gig worker income is not going to count towards Social Security in retirement. How then would a gig worker survive in retirement? Savings?

The cannabis industry question is one I have wrestled with since starting my practice in 2006. The lack of a 401k plan for this industry is tied to the government's classification of cannabis as a Schedule I drug. With the drug being viewed as illegal, many banks want nothing to do with the industry. The 401k space has followed suit. Granted, I am aware of one dispensary that classifies itself as a healthcare supplement company and thus offers a 401k.

Perhaps the financial services industry will take a different view with the DEA's proposal that cannabis be a Schedule III drug? One can only hope. I agree with the dinner attendees. Everyone should have a right to retire with dignity.

The dinner attendees also touched on the need to democratize holistic financial advice. Agreed! One of my 401k client's employees approached me about her credit card debt. She was paying 28% to one credit card company. I explained 401k loans to her and that if she borrowed from herself, she could pay off the credit card company with a 4% 401k loan. And the 401k interest goes back into her 401k. 28% vs 4% and she gets the interest payments?! Point being, many Americans need financial advice across all fronts.

Providing the advice at scale can be tricky from a fee point of view as well as from a fiduciary liability point of view. Still, retiring with dignity is something we should all aspire to. Again, I am not ignoring personal responsibility but at the same time, let's remove what barriers we can as a society.

I was discussing with a group of employees how much Social Security could pay when they got to retirement. They tried to imagine how they might live just on that monthly amount. It soon became apparent that "how" was not feasible in the city where they lived and worked. Living expenses there were too high!

If that is the case (as it is for many parts of the country) then we need to make as easy as possible for people to save. Relying on government programs is helpful to a point but I do not think government programs are sufficient. Self-reliance (combined with a living wage) is needed. And there likely needs to be a conversation about the shift in American behavior from saver to consumer. Perhaps that is for the next 401k Geek dinner?