The gig economy offers workers advantages including more independence and flexibility, but company-sponsored retirement saving is not one of them. Independent contractors, agency temps and other non-traditional workers are about two-thirds less likely than standard workers to have access to an employer-provided retirement plan, according to a 2015 General Accounting Office report.
It may be especially tough for those who gig at small companies, which are less likely than larger employers to have any retirement plan. For instance, in 2012 GAO found only 14% of small businesses have company-sponsored retirement plans.
This situation looks like opportunity to William Hurley, co-founder of Honest Dollar, an Austin, Texas, startup that offers IRA-type retirement plans designed for small companies, including those that use independent contractors. "It's the first retirement plan for the modern world," he says.
Honest Dollar's plans are designed to be simple to set up and use and low in cost. For $10 a month, companies that employ 1099 contractors can have set amounts deducted from paychecks, just like many permanent employees of larger firms can. Funds are invested in four Vanguard ETF funds with portfolio allocations based on the investor's level of risk tolerance. Contractors can set up a plan in minutes, using a Smartphone.
Business at the year-old company is going "tremendously well," Hurley says. Honest Dollar recently signed a deal with ridesharing company Lyft to provide plans to 110,000 drivers. It's also arranged with Payable, which processes payments and taxes for 1099 employers, to let its users sign up for Honest Dollar plans at a discount rate of $4 monthly.
Workplace retirement plans that let employees set up automatic deductions to fund retirement have been found to significantly boost retirement savings. And the lack of such plans in the gig economy may be growing into a bigger problem. The 2015 GAO said contingent workers, including part-timers as well as contractors, made up 35% of employed workers in 2006 and 40 percent in 2010, the latest year data was available.
Independent workers have long been able to set up one-person 401(k) retirement plans, which operate similarly to the employer-provided 401(k) plans that are the standard for most American workers. One-person 401(k) plans are marketed by many large retirement plan companies as Solo 401(k) or Uni-K or similar names.
Hurley, a software entrepreneur without previous financial industry experience, says existing solutions are too costly and cumbersome for either small employers or their subcontract workers. Honest Dollar uses IRA savings plans rather than 401(k) plans, because IRAs are simpler and more portable and better-suited to gig economy workers, he says.
Others like the 401(k) model. San Francisco-based Ubiquity has offered retirement plans tailored to small employers since 1999. The company's version of the solo 401(k) is called Single(k) and offers flat fees and web-based setup.
As a 401(k), Single(k) lets workers make larger contributions, notes Ubiquity spokesperson Alyssa Witt. Current rules for 401(k) participants allow them to contribute up to $18,000 a year, plus an additional $35,000 of profit sharing for a total of $53,000. Honest Dollar also offers optional SEP IRAs that allow higher contribution amounts. Regular contributions to traditional and Roth IRAs currently cannot exceed $5,500, or $6,500 for workers age 50 and up.
These higher limits help make the 401(k) a better approach for independent contractors as well as regular workers, Witt says. "The product mimics what corporations offer as benefits to employees," she says.
Hurley's vision is for Honest Dollar to dominate the retirement space for small business and independent contractors. He's got plans for features that will let Honest Dollar IRA plan members inter-operate with other 401(k) accounts. He also hopes to further ease and speed the signup process.
Honest Dollar's biggest competitors won't be big 401(k) providers, Hurley says, because small employers and independent contractors aren't individually big enough to attract major players' attention. But Honest Dollar can serve them economically and profitably, he believes.
"We don't have to rip people off," he says. "There's plenty of margin."