A declaration for 'independents': Let them save!

In the mid-to-late 2010s, it seemed as if the entire world was acknowledging the rise of the independent workforce. In fact, independent work had been around a long while, presenting its own unique challenges to employers and policymakers.

According to the U.S. Bureau of Labor Statistics, the percentage of workers who classified themselves as "independent" held rather steady from 1995 to 2001, grew in 2005 and then actually decreased from 2005 to 2017. But the visibility and popularity of platform-based "gig" work made benefits professionals sit up and ask an important question: how can we ensure independent workers have opportunities to access retirement savings?

Even companies that primarily rely on a traditional workforce also regularly engage independent and gig workers to fulfill certain roles or projects. Many of these companies want to provide these individuals with access to retirement coverage, whether as a recruitment tool or simply to promote financial security. 

And so in 2018, we developed a set of principles to guide future advocacy efforts with respect to legislative and regulatory proposals addressing the independent workforce. The principles are embodied by "five Cs": 

• Choice: recognize independent work as the product of a free labor market, addressing the desires of workers and companies that benefit from such services.
• Coverage: allow companies to help independent workers obtain health and retirement coverage on a group basis.
• Consistency: build on ERISA's federal framework for plan design and administration.
• Cooperation: ensure that future policies support and enhance the existing and successful employer-sponsored benefit system.
• Creativity: support company innovation for attracting and retaining talent.

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While some of the public conversation about independent workers and "gig work" has faded into the background of other social and economic issues, that segment of the workforce has quietly exploded. 

As reported in the MBO Partners State of Independence in America Report 2023, the number of full-time independent workers has grown significantly within the past five years, reaching 26 million last year – a 20% increase over 2022. Growth since before the pandemic is even greater, up 73% since 2019.

Independent workers are prohibited from participating in employer-sponsored retirement plans maintained by the company hiring them, meaning that the surge in independent workers translates into a surge in workers without workplace retirement coverage. And because participation in a workplace retirement plan is a leading indicator of financial security for life after work – consistent with the "coverage" principle above – it is important to find avenues for independent workers to save.

The key to addressing coverage issues for gig workers is to recognize that each independent worker is effectively his or her own employer – technically, a sole proprietor or other unincorporated entity. Theoretically, an independent worker is able establish and participate in her own 401(k) plan, SIMPLE IRA or Simplified Employee Pension (SEP). The problem, therefore, is not the legal availability of retirement plans. The challenge is how to help gig workers access available tools because the reality is that it is not always easy for individuals to adopt a retirement plan on their own. 

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This is where Congress has helped immensely over the past five years. Through the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Congress made available pooled employer plans (PEPs) and defined contribution groups (DCGs) – vehicles that allow small and/or unrelated employers to sponsor a plan and still achieve economies of scale. 

To help independent workers take advantage of these opportunities, we have developed a five-part plan for policymakers:

1. Clarify that contributions by a company directly to a PEP or DCG, in which an independent worker participates as an employer, would have no effect on the worker's independent contractor status with respect to the company. This is critically important for employers requiring assurance that the current law employment classification rules will not be compromised.
2. Direct regulatory agencies to promote and facilitate arrangements for independent workers like PEPs, DCGs and SEPs through guidance providing appropriate relief from regulatory red tape.
3. Modify the audit rules for PEPs to exempt participating employers with fewer than 100 participants in the PEP. Under current law, if a small employer with fewer than 100 participants joins a PEP with 100 or more participants, the small employer loses its exemption from the typical audit requirement for defined contribution plans. Exempting smaller employers from this requirement when joining a larger PEP will save plan costs for sponsors and participants.
4. Allow plans in a DCG that are subject to the audit requirement to jointly file a single audit as if they were part of the same plan. As with No. 3 above, a DCG may contain some plans that are subject to the audit requirement and some that are not. Allowing plans subject to the requirement to fulfill the obligation collectively could reduce costs by over $6,000 per employer with 100 or more participants.
5. Increase the plan asset threshold that exempts plans for independent workers from burdensome paperwork requirements. 

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The American Benefits Council and its members are true believers in the importance of sustainable financial well-being. Through thoughtful approaches like the above proposal, we can help independent workers achieve that well-being, while staving off other efforts that would undermine or undo the employer-sponsored retirement system.