Talk to entrepreneurs—the kind that operate as sole proprietors—and you'll hear a consistent theme: They love what they do; the only downside is benefits.
The problem for self-employed workers is systemic: Health insurance requires large groups to pool risks; and the attributes of a quality 401(k) plan—access to top investment options, plus web access and efficient recordkeeping—are only affordable to multi-million-dollar retirement plans.
Leveling the benefits playing field
It took an entrepreneur to solve this problem. In 1996, Sara Horowitz founded Freelancers Union as a non-profit whose mission is to advocate for independent workers nationwide, with a specific focus on leveling the benefits playing field. "We now have 135,000 members nationally," says Sara. “The world of independent work is about a third of the current workforce. People these days are increasingly going from job to job and from project to project. What we're trying to do is to set up benefits that allow for this kind of portability."
Freelancers Union's first step was to pool its members to create an affordable group health insurance policy. "Freelancers used to figure out health insurance on their own but now we can offer them affordable group rates," Sara says. "By grouping people together, you get so many economies of scale. Now we can afford as a group to hire Milliman to help us figure out the best way to manage the group to make sure that it's sustainable in a non-profit way over time."
Working in conjunction with Milwaukeebased Milliman health consultant Mike Sturm, the Freelancers Union health plan now offers health insurance to about 23,000 New Yorkers. This pilot program is the first of its kind.
A quality 401(k) for the self-employed
Freelancers Union then determined that the ability to save and invest in an affordably priced 401(k) vehicle was the next priority. At the time, a comprehensive retirement solution simply wasn't available. So the nonprofit turned to Milliman to get answers.
Milliman helped Freelancers Union design a plan that offers a degree of support and direction similar to that of an employergenerated 401(k). "We do all the record keeping," says Laura VanDomelen, head of Operations for Milliman's Southern Employee Benefits Region. "And we basically do a lot of the footwork for participants. We make sure that their contribution limits are watched, that they don't make any glaring errors, that they get their forms filed if they need them. What we don't say is, 'the instructions are online, you go figure it out.'" The bottom line is ease of participation: "The plan has an automatic payroll deduction feature—it's entirely elective and, of course, they can make changes."
This kind of automatic enrollment was a key feature in the nonprofits plan design. "We really wanted to take the principles of behavioral economics and have a system in place that had a default option," says Sara.
A second critical aspect of the plan is its robust investment options. Milliman selected a variety of mutual funds representing a dozen asset classes to help ensure adequate diversification. All investments are monitored by Milliman on a quarterly basis.
To eliminate the guesswork in combining asset classes properly, Laura's team also created age-based target-date model portfolios. Participants can tweak their investment allocations, but asset allocation "defaults" are set out for those who would rather leave the investment decisions up to professionals. An online calculator helps participants determine how much they can save into the plan based on income—and the tax savings this will generate for them.
And yes—low fees
Prior to the creation of the Freelancers Union 401(k) plan, IRAs were really the only affordable option for independent workers' retirement savings. However, compared to a traditional IRA, a 401(k) plan provides the advantage of much higher contribution limits. Before the Freelancers Union's product was available, individuals who wanted to set up a 401(k) had to do it through a broker, where the fees tended to be prohibitively high. And for those seeking to diversify their investments, there was also the added burden of meeting set minimums per fund within the plan. That's why the low fees, zero minimums, and investment flexibility of the Freelancers Union plan are such important benefits.
"This truly is a unique product that is advantageous to participants," Laura says. "Freelancers Union has been a great partner to work with: It takes innovation on both sides to come up with smart solutions. And we're still at it—we'll be rolling out more customizable features throughout 2010."