Kenneth Glad
Retirement saving can be difficult when everyday costs leave little room for long-term planning. A newer workplace benefit is trying to address that problem by shifting more of the funding burden toward employers.
Ted Benna, the benefits consultant widely credited with pioneering the modern 401(k), is promoting another way for lower- and middle-income employees to build savings.
“The 401(k) isn’t working really well now for many middle- and lower-income employees,” Benna told Bloomberg.
His concern centers on affordability. Traditional 401(k) plans generally depend on employees setting aside part of their wages, often with an employer match. That model can work well for people with enough income to contribute regularly, but Benna argues that many workers cannot spare the money.
He said some employees “can’t afford to have money taken out of their paycheck even if they have the opportunity to do so.”
401(k) plans nevertheless remain a major part of the US retirement system. Recent industry data places total assets in the plans at close to $10 trillion, while tens of millions of Americans participate in them.
A different workplace model
Benna and entrepreneur Kyle Bagley are behind Radish, an employer-funded savings arrangement designed to reward employees while helping them accumulate money outside their normal wages.
According to Money, employers can connect contributions to workplace goals such as attendance, safety or performance. One example would allow a company to deposit a small amount into a worker’s account each time that employee meets an attendance target.
The central difference is where the money comes from. Instead of asking workers to redirect part of their paycheck, the employer funds the account. Radish is also promoted as offering potential payroll-tax advantages for participating businesses, depending on how the plan is structured.
Money reports that Radish recommends using a money market account as a relatively simple place to hold the funds. The balance may later be transferred into a traditional retirement vehicle such as a 401(k) or an IRA.
The publication also reported that the benefit is aimed at employees earning no more than $155,000 annually. That eligibility threshold should be read as a feature of the specific Radish structure rather than a general rule applying to workplace savings plans.
Flexibility comes with rules
Another part of the proposal is greater access to accumulated savings than workers normally have with a standard 401(k).
Employers can set circumstances in which employees may be allowed to use the money, including certain medical expenses or urgent vehicle repairs, according to Money. That could make the account useful as both a longer-term savings vehicle and a financial buffer for unexpected costs.
Withdrawals can still have tax consequences, however, and the treatment may depend on the structure of the plan and the circumstances of the withdrawal. Money reports that some withdrawals made before age 59 and a half may face federal income tax and an additional early-withdrawal penalty.
Radish remains at an early stage. Bloomberg has reported limited adoption so far, while Money said the company planned a pilot with a trucking business employing about 200 people.
Benna sees Radish as a way to help workers who find it difficult to save when most of their income goes toward everyday expenses.
Sources: Bloomberg, Money
