Addressing the Haves and Have-Nots in Retirement Savings

Reports that retirement savings increased during the COVID-19 pandemic do not tell the whole story. Many Americans lost their jobs—and their benefits—and some had to dip into their retirement accounts to make ends meet.

Ed Farrington, head of retirement and institutional investing at Natixis Investment Managers, says the effect the COVID-19 pandemic has had on retirement savings has highlighted the issue of income inequality in the U.S.

“The U.S. scores very high in per capita income but is in the bottom 10 of the list of countries when it comes to income equality. This topic shines a light on that,” he says. “Those who were able to continue with their jobs and had a workplace retirement plan were able to continue contributing to retirement savings and were less likely to have to withdraw from their accounts. And, with the market doing well last year, they benefited. It further exacerbates the gaps between the haves and have-nots.”

Farrington says the retirement planning industry has a voice in the matter. “The system relies heavily on participation in a retirement plan, which corporations and policymakers have a hand in,” he says. “There are things we can do to give people the best possible chance to have income they can rely on in retirement.”

Farrington say the No. 1 priority is to make workplace savings plans more readily available. The establishment of state-run retirement plans and pooled employer plans (PEPs) is a start, he says. While distributions and loans from retirement plans are generally discouraged, they were a lifeline for some participants during the pandemic; those without a plan didn’t have those options available.

Another important piece of addressing inequality is for plan sponsors, to the extent that they are capable, to offer a matching contribution on employee deferrals. “We know the match is of tremendous value for employees and a tremendous incentive to save,” Farrington says.

Another incentive for people to save is the tax-deferred nature of retirement plans. “We should make sure we defend that,” Farrington says. “If the ability to contribute to plans on a tax-deferred basis is removed, it might offer the government a short-term benefit to budget reconciliation but it could have a long-term negative effect on retirement savings.”

Farrington says employers should offer a holistic benefits package to help with income disparity. “It’s important to provide employees not just with a health care plan, but also education about health care in general. Health care is where people spend the most money out of pocket in retirement, so plan sponsors can help them take steps now to mitigate that risk,” he says.

Natixis asked retirement plan participants to choose between 30% less in income and a holistic benefits package, or no benefits and 30% more income, and the majority (70%) chose less income and holistic benefits. “So we can see employees are looking to the workplace to help them have a better quality of life,” Farrington says.