Many self-employed people are attracted to self-employment by the flexibility and freedom of being their own boss. But the big trade-off is the lack of retirement benefits.
New research by the Pew Charitable Trusts finds that only 21.9% of non-traditional workers — defined as temporary, temporary, replacement or freelance workers — participate in a defined workplace contribution plan. Defined contribution plans are those in which employees contribute, and the employer generally matches what they have set up—such as 401(k) and 4013(b) plans. When these plans become available to them, unconventional workers are quick to sign up. Of those who received a plan, 77.5% decided to participate in it. Pew Charitable Trusts surveyed 1,000 self-employed people for the research.
The COVID-19 pandemic has brought new attention to the lack of a social safety net for the self-employed and the self-employed, resulting in unemployment benefits being offered to these workers on a large scale for the first time. This report draws attention to another important part of the safety net. Currently, many nontraditional workers may retire without adequate income or Social Security benefits or unable to retire because they lack access to employer-sponsored plans, the report found. 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 categorized. As the IRS says, “Companies that offer employee-type benefits such as insurance, a pension plan, vacation payments, or sick pay have employees. Corporations generally do not grant these benefits to independent contractors.”
The research emphasizes an opportunity for service providers that can assist employers in providing emergency workforce retirement benefits on a large scale in a way that does not require employers to change the status of these workers. In many companies, freelancers, temporary employees, 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 providing retirement benefits to freelancers, the gap in the market is widening. Only 46.3% of non-traditional workers were eligible for any type of employer-based retirement plan within the past year. Of 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 non-traditional workers surveyed said they wanted retirement benefits in the workplace. This was the second most sought-after benefit, after health insurance, with 76.6% wishing to have it.
The report’s authors urge that “solutions are needed that provide direct and effective retirement savings opportunities for all workers.” “If given the opportunity, it will save many workers.”
Fortunately, some freelancers seem to be bridging the gap by grouping hybrid jobs together. They may be handling many independent projects with a traditional part-time job that offers advantages. Among the self-employed with one traditional job, 69.7% had access to a retirement plan. It wasn’t clear if they were choosing these traditional jobs primarily to become eligible for benefits — the way some do for group health benefits — or if there were other major motives.
In the absence of a comprehensive solution to help free agents at the moment, Pew Charitable Trusts suggest some solutions:
The state has facilitated automatic IRA programs, which private sector employees can join if they do not have a workplace plan
Encouraging savings through the tax system, financial institutions, or financial technology applications.
While solo entrepreneurs have access to savings vehicles like IRAs and 401(k)s, many of those who are busy working to earn a living never get around to researching or preparing them. Offering some kind of extended solution available to all non-traditional workers could prevent many from suffering financially when they reach the years when many people retire.