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From McKinsey Global Institute, Independent work: Choice, necessity, and the gig economy

According to the October 2016 McKinsey Global Institute’s studies of the Gig Economy, up to 68 million people participate, in some form or fashion, in independent work in the United States. Of that 68 million, 32 million are estimated to contract independently as their main source of income.

In the last 20 years, the number of Gig Economy participants has increased by 27% more than payroll employees. In some sectors, the Gig Economy is already eclipsing traditional employment options. In larger cities, it’s impossible not to notice the absence of cabs in favor of Uber and Lyft.

This data, and other highly publicized studies and analyses, indicate that in the near future independent contracting options will match, if not eclipse, options for traditional employment. As it stands, none of these workers will have access to a reasonable retirement plan outside of a traditional Solo 401(k)s and IRAs with administrative costs that can discourage them from investing in their retirement. It is up to the main players in the retirement industry, including recordkeepers, 3(16)s, and 3(38)s, to adapt their business models to the needs of the changing workforce.

Obstacles

The financial picture for a full time independent contractor is not one of desperation, but it does fall significantly below the national average. It’s estimated that the average annual income for a full time Gig Economy participant is $20,000 below the annual average for traditionally employed individuals. Making less money is not the only challenge these workers face; income can also be inconsistent, since it depends on the individual’s participation and the strength of the target market.

Those challenges would be enough in themselves to curb retirement investment, but independent contractors also have to contend with the lowest benefit availability, across the board. According to an analysis by Prudential, Gig only workers have the least access to long and short term disability, vision, dental, medical, and life insurance, along with any other benefit you could care to name. These financial concerns, compounded with a lower average income, make it nearly nonviable to contribute to retirement savings with the options as they stand. 

Options

Currently, the only real options for independent contractors to save for retirement are Solo 401(k)s or IRAs. For the purposes this piece, we’ll focus on Solo 401(k)s. TAG Resources offers the Solo(k) Retirement Solution with plans currently set up for Jockeys, real estate agents, and professionals such as doctors and lawyers. Another product offered by TAG Resources, Cash Balance Retirement Solution, can also be used by Gig workers to maximize their retirement savings when teamed up with their Solo(k).

In addition to the TAG Resources Solo(k) Retirement Solution using Transamerica as the recordkeeper, there are others provided by Fidelity, Vanguard, Charles Schwab, E-Trade, and TD Ameritrade. The TAG program was specifically designed to minimize the two drawbacks to investing this type of retirement plan for independent contractors; in many cases, administrative fees for Solo 401(k)s are much higher than in employer sponsored plans, and the generally lower income of Gig workers means that their retirement horizon is either much further away or their standard of living is necessarily lowered to meet their retirement goals. 

One way to address this is to invest in higher risk funds. If a later retirement age is acceptable, higher risk funds can pay off, with the idea that the participant has more room to ride the market’s ups and downs. For a group of workers without benefits, however, this approach could be hard to stomach. In the case of an unexpected expense, high risk funds could impede the participant’s ability to take a loan against their account.

The solution to this problem is to provide a retirement plan with fees comparable to sponsored plans and enrollment and loan options geared toward those with lower or inconsistent income. Those options exist in Multiple Employer Plans. Of the two types of MEP’s, Closed and Open, Open MEP’s would be preferable for independent contractors. Open MEP’s, while not currently allowed, have broad support in Congress, and the likelihood of Open MEP legislation passing soon is very high. TAG Resources addresses the problem of keeping administrative fees in check by utilizing the aggregation abilities founded in our trademarked program, The Open MEP®. 

Troy Tisue, President of TAG Resources, participated earlier in the year at a Senate hearing and round-table discussion on the Gig Economy with emphasis on retirement plans, benefit options, and other human resources concerns.

An Open MEP is a qualified 401(k) retirement plan established under 413(c) of the Internal Revenue Code that permits unaffiliated employers to adopt into a retirement plan sponsored by an outside entity that bears responsibility for administering the plan.  That means one entity can sign on as a plan sponsor and anyone who qualifies, regardless of their job status or income, could utilize a 401(k) at dramatically lower administrative cost due to the economy of scale, increasing the ability to save and lending stability to the overall portfolio. If open MEP legislation currently being considered were to pass, open MEP’s would almost certainly become the preferred retirement savings vehicle for Gig workers.

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