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Retirement in the Gig Economy

Part-time work creates worrisome challenges for workers trying to build towards a secure retirement.

My 25-year-old son bought his first car last fall and promptly delivered the surprising news that he had signed up to drive for Uber to pick up a few extra bucks. Then came this question: “What’s this thing called Betterment I see in the Uber app? It’s something about retirement—is that something I should be doing?”

The answer was “no”; he works full time and is just driving for Uber in his spare time. But the partnership rolled out last summer between Betterment and Uber points to a fast-growing opportunity for the financial planning business: serving workers in the gig economy. Although that phrase often conjures images of the new economy—workers untethered from traditional employment—it really references the broader trend toward part-time work and people like my son who work full time but take on additional work on the side.

The Betterment-Uber partnership, rolled out last summer to offer IRAs and retirement planning advice to Uber drivers, is available in nearly all of Uber’s markets now. Drivers can start the enrollment process from the same app that they use to respond to passenger requests for rides. For the first year, no fees will be charged in order to entice drivers to sign up.

The deal gives Betterment a lead generation pipeline in the gig economy labor force—a market it thinks can only grow. Before the Great Recession that began in 2008–2009, part-time workers constituted about 17 percent of the labor force; during the downturn, that figure spiked to just over 20 percent. Even today, part-timers account for more than 18 percent of the workforce, according to the Bureau of Labor Statistics.

Part-time work creates worrisome challenges for workers trying to build towards a secure retirement. A recent research report by the Pew Charitable Trusts illustrates how the trend is hurting the retirement prospects for various segments of the workforce. The researchers’ concerns focus mainly on millennials, Latinos and African Americans.

These workers tend to be employed in “lower-hour” industries where part-time work is more prevalent, including retail trade, arts, entertainment, recreation, hospitality and food service. And they are far less likely to have a retirement plan or other benefits, such as health insurance and paid time off.

Pew’s research, based on U.S. Census Bureau survey data, found that 56 percent of part-time workers in lower-hour industries do not have access to a 401(k) or other retirement plan, compared with just 29 percent of full-time workers in higher-hour industries. And when a plan is offered, participation rates are also lower than average for part-time workers.

The gaps affect millennials and minorities disproportionately. Nearly 39 percent of millennials work in lower-hour industries, compared with 20 percent of older workers. Meanwhile, 28 percent of Hispanics and 26 percent of African Americans work in lower-hour jobs, compared with 23 percent of whites.

A study by the U.S. Government Accountability Office (GAO) published in October noted that even long-term part-time workers can be excluded from retirement plans if they work less than 1,000 hours annually (about 19 hours weekly).

But gig workers also can be older workers. Uber reported in 2015 that nearly 25 percent of its drivers are over age 50. A rising number of older workers are starting small businesses to supplement income and retirement savings and to delay claiming Social Security benefits in order to optimize benefits. Often these businesses are “micro-enterprises”—really not much different than part-time gig jobs. Or, they are gig projects, like renting out rooms on Airbnb.

From a retirement planning perspective, the challenges facing gig workers are not completely unique. “They don’t have enough guidance on retirement,” argues Joe Ziemer, vice president of communications at Betterment. “Even if you look at how the 401(k) industry is structured, most people are left to figure things out on their own.”

But some of the challenges do stem from the nature of gig work. That includes uneven, unpredictable income; the absence of employer contributions to retirement accounts and the need to purchase health insurance separately from work.

That’s why Betterment’s approach goes well beyond low-cost IRAs. Uber drivers who join the program can access Betterment’s RetireGuide suite of retirement planning services. “We can look at the person’s entire financial situation,” says Ziemer. “That includes other retirement accounts they may already have, non-retirement assets, a spouse’s finances and Social Security projection and optimization.”

Betterment and Uber aren’t alone in turning to technology to address the issues. Uber rival Lyft offers its drivers savings plans through Honest Dollar. An app called Even helps people who have fluctuating incomes by automatically pulling money in and out of savings accounts in months when income is higher or lower.

“This is all about providing access,” says John Scott, director of Pew’s retirement savings project. “It may well be that some of these apps from fintech companies that make it easier to save through a smartphone can have an important impact.”

Getting people to start saving at an early age—even small amounts—could be especially advantageous due to the power of compounding. A worker who contributed about $2,600 by age 20 could accumulate more than $85,000 at retirement age, according to a recent report by the U.S. Government Accountability Office; the same worker starting at age 48 would need to contribute $26,000 to accumulate that $85,000 nest egg.

The GAO's study concluded that plan rules on eligibility and vesting pose a significant barrier that should be tackled through reforms of the Employee Retirement Income Security Act (ERISA). For example, “last day” rules used by some plans require workers to be employed on the last day of the year to receive an employer match. And, some plans prohibit participation by workers younger than 21 years old.

GAO also urged Congress to consider re-evaluation of rules on vesting in light of rising workforce mobility. The report found, for example, that if a worker leaves two jobs after two years, at ages 20 and 40, where the plan requires three years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement (in future dollars).

Finally, improving overall availability of workplace saving should be a priority, since roughly half of all workers have no access to a workplace retirement plan. Some states, led by California and Illinois, are creating their own programs for uncovered workers that would require employer participation.

In September, the Senate Finance Committee sent legislation to the full Senate (the Retirement Enhancement and Savings Act of 2016) calling for changes to ERISA to allow employers from different industries to band together to create “pooled plans” as a way of reducing expense and administrative burdens of plan sponsorship.

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