Many freelance workers are drawn to self-employment by the flexibility and freedom to be their own boss. But one big tradeoff is a lack of retirement benefits.
New research by the Pew Charitable Trusts found that just 21.9% of nontraditional workers—defined as contingent, gig, alternative, or independent workers—participate in a workplace-based defined contribution plan. Defined contribution plans are those where employees contribute, and the employer generally matches what they put in—such as 401(k)s and 4013(b) plans. When these plans do become available to them, nontraditional workers are quick to sign up. Among those who had access to a plan, 77.5% decided to participate in it. Pew Charitable Trusts surveyed 1,000 freelancers for the research.
The COVID-19 pandemic brought new attention to the lack of a social safety net for freelancers and the self-employed, ushering in unemployment benefits for these workers on a large scale for the first time. This report calls attention to another critical piece of the safety net. Currently, many nontraditional workers may retire without enough income or Social Security benefits or be unable to retire due to their lack of access to employer-sponsored plans, the report finds. Some may turn to Medicaid or Supplemental Security Income, “straining state and federal budgets,” the report notes.
However, one obstacle to change could be how workers are classified. As the IRS puts it, “Businesses providing employee-type benefits such as insurance, a pension-plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.”
The research underscores an opportunity for providers who can assist employers in offering retirement benefits to their contingent workforce at scale in a way that does not require employers to change the status of these workers. At many companies, freelancers, temps and contractors have become an essential part of the team, but they don’t necessarily want to become traditional employees. Employers who want to attract and retain them will need to find creative solutions.
When it comes to offering retirement benefits to independent workers, the gap in the marketplace is gaping. Just 46.3% of non-traditional workers were eligible for any type of employer-based retirement plan within the past year. Among those surveyed, 33.9% had an employer who offered a defined contribution savings plan, and only 11.3% had an employer who made them eligible for a defined benefit plan, also known as a pension.
Two-thirds of the nontraditional workers surveyed said they wanted workplace retirement benefits. These were the second most sought-after benefit, after health insurance, which 76.6% wished they had.
“Solutions are needed that provide retirement savings opportunities directly and efficiently to all workers,” the report’s authors urge. “If given the opportunity, many workers will save.”
Fortunately, some independent workers seem to be bridging the gap by piecing together hybrid careers. They might be juggling several freelance projects with a part-time traditional job that provides benefits. Among the freelancers with one traditional job, 69.7% had access to a retirement plan. It wasn’t clear if they were choosing these traditional jobs mainly to become eligible for benefits—the way some do to get access to group health benefits—or if there were other main drivers.
In the absence of a comprehensive solution to help free agents right now, Pew Charitable Trusts suggests some solutions:
· State facilitated auto-IRA programs, which private-sector employees could join if they had no workplace plan
· Encouraging savings through the tax system, financial institutions or fintech apps.
While solo entrepreneurs do have access to savings vehicles like IRAs and solo 401(k)s, many of those who are busy hustling to make a living never get around to researching them or setting them up. Offering some type of scaled-up solution available to all nontraditional workers could keep many from struggling financially when they reach the years when many people retire.
