Retirement Plans and the Sharing Economy

There has been a tremendous amount of chatter and no doubt you are at least somewhat familiar with the term, and the practice of the sharing, or peer-to-peer, economy. For those that are not or just to verify what we are talking about, The People Who Share website has a pretty good description:

The Sharing Economy is a socio-economic ecosystem built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organizations.

Uber LogoThere are task brokers such as TaskRabbit and Fiverr; on-demand delivery services like Postmates and Favor; and grocery-shopping services like Instacart. Among the most well-known services are Airbnb, the short-term-stay broker and of course, the ride-sharing services, Lyft and Uber.

Those that participate as providers are often drawn to the idea of self-management and stepping outside of the typical hustle and bustle; and the ability to diversify their work life on schedule that works best for them.

How do retirement plans fit into this sharing economy and self-management, particularly for individuals who have accrued multiple accounts over the course of their working lives?

As a growing number of Americans take part in the so-called sharing economy, in which a single worker may simultaneously fill part-time and freelance positions with multiple employers, reforms are needed to make the retirement-savings system less tied to employers, argues a new paper from the R Street Institute.

R Street Associate Fellow Oren Litwin notes the situation is made possible by the fact that, “under the current system, assets in employees’ 401(k) accounts do not actually belong to the employees. Instead they belong to the sponsor company (the employer), and are held in trust for the employees’ eventual benefit.” Litwin suggests reforms that would put retirement accounts under the direct control of employees.

Sharing Economy

Such a system might involve unique worker-controlled accounts earmarked for retirement savings, insurance products and taxable salary. Employers would contribute directly to these accounts, just as they currently deposit paychecks in employees’ checking and savings accounts. The accounts would belong to the employee, thereby significantly reducing the complexity and administrative inefficiency associated with saving for retirement.

The end goal, Litwin notes, is to make “our retirement system less restrictive, less costly and more widely available to everyone.” But he cautions that, in designing a new system, we should be careful not to lose any of the key capabilities of the old one.

“Employee-benefits plans have developed other functions beyond simply providing insurance and encouraging retirement savings,” Litwin writes. “Attempting to replace the current benefits system without fully understanding what it does could lead to tremendous disruption of people’s financial lives.”

Among the capabilities he cites are the ability to borrow from one’s own savings, incentives to encourage employers to reward lower-paid employees through employer matching and profit-sharing, and the ability of employers to use vesting schedules to encourage employee retention.

R Street is a non-profit public policy research organization that supports free markets; limited, effective government; and responsible environmental stewardship. It has headquarters in Washington, D.C. and five regional offices across the country. Its website is www.rstreet.org.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

8 Comments

  1. The biggest challenge for a system of retirement savings that is not run by the government is to get people to invest in it. As a teacher in Canada, I will have an old-fashioned pension. In my particular case, I’m glad that I had no choice but to contribute to my pension plan all through my younger years when I had my head in the sand financially! A paradigm shift is needed if we go the route of “worker controlled” retirement accounts. It simply doesn’t occur to most people to be proactive about their retirement – especially when they’re young.

    • A paradigm shift is needed if we go the route of “worker controlled” retirement accounts. It simply doesn’t occur to most people to be proactive about their retirement – especially when they’re young.” I believe that shift is already underway. People are starting to look at managing their work lives in a different way. We are are starting a shift to producing – Mr. Groovy at Freedoom is Groovy has a nice piece up about about the Craft Economy – and utlizing services in new ways. I believe it follows that a change in workplace retirement plans is inevitable. As people start to manage their work lives in a different way, the question is will people become more financially literate and become more proactive in managing their financial lives? If not, they will face serious headwinds during their working lives and will likely find themselves in a position where retirement – in any meaningful way – is unlikely.

      Thanks for stopping by and sharing your thoughts, my friend.

  2. Excellent point. I think this highlights a lot of broader issues about the growth of the sharing economy. Sure, in many cases, these have opened opportunities for people to do side jobs as taxi drivers, house cleaners, delivery services, bed and breakfast owners, etc. But unlike traditional employment in these industries, they don’t afford as much job security. A house cleaner was traditionally employed by a cleaning company, and would get paid on a regular and consistent basis (even if that pay was low). But TaskRabbit-style cleaning services are hit-or-miss and sporadic. Same with Uber vs. taxi, or AirBnB versus employment at a traditional Bed and Breakfast. Oh, and benefits are a big NO in these sharing economy services. They were sometimes present in their more traditional forms. This just complicates retirement saving issues: if you’re not making consistent incomes, it’s really hard to save at all!

    • Indeed, there are a lot of questions in this rapidly evolving economy. As noted by Kyle and Larry, financial education and literacy is critical; even more so in an environment where individuals choose – or are forced into – the role of self-management, not just with respect to securing and maintaining, but also with effectively managing retirement accounts.

      A worst-case scenario would be one where the sharing economy drives income and benefits down; and puts people in a position where they have to take more control of the retirement accounts, but lose money (i.e. pay higher fees, make poor investment choices, etc.) – the little they are able to invest – due to their financial illiteracy.

      Thanks for stopping by and sharing your thoughts, Frank.

  3. I’ve wondered about this before. My work uses SIMPLE IRA instead of a 401k, you can only contribute $12,500 to the Simple vs $18k to 401k. Seems odd and unfair to me, plus you’re stuck with investing through whoever your company uses and they’re likely to have lots of fees. I have front load fees for my work’s retirement plans and pretty high expense ratios. Frustrating when you do know more than the average person about what you’re doing. I’ve also played mental games with myself not getting into a work’s retirement plans because I was pretty sure I wouldn’t work there long. That wouldn’t be an issue if it was my personal account unattached to my work except for their contributions.
    *On Larry’s comment, you can be steered into bad investment options with work plans too. Almost all financial advisers are not fiduciaries.

    • “I have front load fees for my work’s retirement plans and pretty high expense ratios.” Yikes! Hate both front end loads and high expense ratios.

      “Almost all financial advisers are not fiduciaries.” Something that most are unaware of. A couple links for those that might like to know more:

      Fiduciary Definition – Courtesy of the Consumer Finance Protection Bureau (CFPB)
      Proposed Fiduciary Rule – Employee Benefits Security Administration, Department of Labor

      Thanks for stopping by and sharing your thoughts.

  4. That’s extremely interesting. I hadn’t come across that paper yet so thank you for sharing! This makes perfect sense to me as it is taking the rolling of a 401K into an IRA once you leave an employer to another level. The only concern that I have is that people generally don’t know how to invest properly, so I would add on that these individual accounts would be automatically signed up for a Target Date account. People could then opt-out and put the money where they wanted, but that would at least help out the people who wouldn’t know where to start by getting them on a decent foundation.

    • “The only concern that I have is that people generally don’t know how to invest properly … .” Absolutely agree. The reality is that most are financially illiterate. What is need in this country is more personal finance education, particularly if we move to an environment where individuals have more control and management of the their work structure and the corresponding retirement plans.

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