Growing Pool of Gig Workers Left Out of State Retirement Plans

When New York state launches its guaranteed private-sector retirement savings program next year, gig employees and independent contractors won’t be participating, continuing a pattern among states that have enacted similar initiatives and left out atypical workers.

For gig workers in New York City, the exclusion was particularly acute. The city paused its guaranteed private-sector retirement savings program last year to allow the state-sponsored law take effect, eliminating the carve-out for gig workers and independent contractors.

The state and city programs were otherwise nearly identical: Most employers that didn’t already have a workplace pension or 401(k) plan would be required to automatically enroll their workers in a new plan the government was backing. But where New York City explicitly invited self-employed and nontraditional workers to participate, the state program made no mention of them.

Gig workers, who represent one of the fastest growing sectors of the U.S. economy, are at the center of a new problem emerging amid the surge of states establishing retirement security programs. Only eight of those 14 states explicitly allow nontraditional workers to participate, according to the Center for Retirement Initiatives at Georgetown University. Even those states that do allow voluntary participation face uphill battles encouraging individual workers to participate.

New York City is still hoping to cast a wider net for participants.

“As part of our agenda for the future, let’s also look at artists and musicians, and Uber and Lyft drivers, and nail salon techs, and deliveristas, and day laborers—a whole set of people who need retirement security just as much as the rest of us,” said New York City Comptroller Brad Lander.

Payment Pains

Nearly a third of civilian workers in the U.S. don’t have access to a workplace retirement savings account. Workplace plans are most successful at helping employees save long-term. In New York City alone, 90% of workers in businesses with 10 or fewer employees don’t have sponsored retirement benefits, Lander said.

State initiatives like auto-IRAs aim to fill that gap by facilitating a low-cost solution that automatically enrolls workers. Participants can always choose to opt out, but retirement advocates are banking on the idea that they won’t.

The problem for nontraditional workers or the self-employed centers on identifying who is paying those workers and how they’re paid, said John Scott, director of the Retirement Savings Project at The Pew Charitable Trusts.

“It opens a whole new can of worms,” Scott said. “Many of these nontraditional workers are paid in a variety of ways. Real estate agents, for example, get a check at closing. Other workers are paid in cash or in kind. The problem states face is in how they divert the income that’s getting paid into a traditional plan.”

Connecticut, Maryland, and New Jersey each included riders in their auto-IRA laws allowing the boards operating those programs to decide whether other workers can qualify at a future date.

Scott said states are “fully aware” of the problems facing nontraditional workers, but they’re testing out their programs with the “easiest” workers first.

Large businesses with digital payroll accounts can easily transfer data to a state-managed retirement record-keeper, but smaller businesses may manage their payroll with pen and paper. Phased implementation lets states incorporate those different kinds of workplace processes at different times, he said.

Voluntary Participation

Even when gig workers can access state-based savings programs, there’s no guarantee they will, said Doug Magnolia, president of the state savings program at digital record-keeper Vestwell Holdings Inc.

“These are mandates on employers,” he said. “When there isn’t one or they’re hard to identify, it becomes a lot more difficult.”

Vestwell facilitates state-based programs on behalf of Oregon, Connecticut, Maryland, Colorado, and New Mexico.

Language in state auto-IRA laws doesn’t yet contemplate requiring individual workers to make decisions about their savings futures, according to Magnolia.

Evidence from the voluntary retail IRA market isn’t promising. A Pew survey late last year found that more than 78% of gig workers have no money in an IRA balance. Only about half of nontraditional workers had any retirements savings at all, compared to about 65% of the rest of the civilian workforce, according to U.S. Labor Department statistics.

“Gig workers are a big part of the national economy,” said Magnolia. “And their role probably grew during the Covid-19 pandemic. There’s a lot of impetus to include them in the mix, but I think there’s questions about what states can do legally to help.”