Journal of Financial Planning: July 2022
Dani Fava is head of strategic development at Envestnet, the financial services technology company transforming the way financial advice and wellness are delivered. For more information, please visit www.envestnet.com, subscribe to https://envestnet.blog, and follow them on Twitter (@ENVintel) and LinkedIn.
Did you know nearly 60 million Americans participate in the gig economy? That’s over 36 percent of the entire American workforce.
The gig economy is made up of a group of workers who engage in on-demand work, usually app-based, which is paid per interaction rather than by salary. Gig workers often consider themselves freelancers, and the average person interacts with them more than you may think. Some of the most well-known gig economy jobs include Uber drivers, Instacart shoppers, and Rover pet sitters.
The gig economy is enormous—and growing. There’s almost $1 trillion in total income generated from gig work, and according to one study, the gig economy is growing three times faster than the traditional workforce (Mitic 2022).
Many of these gig workers view their income as supplemental to the income they are already earning from their more permanent jobs. However, that mindset is shifting as more gig opportunities continue to become widely available online, posing an opportunity to maximize one’s earnings.
For example, a counselor or therapist may fill up their schedule almost entirely through apps like BetterHelp and Talkspace to provide remote mental health services. A nanny can find steady client engagement on Care.com, and Uber or Lyft drivers can add Instacart or Rover dog-walking to their day to increase wages as well.
This means more people are making a living doing gig work. For some, picking up these extra roles as a delivery driver or dog walker have created opportunities to earn a secondary income. For others, these gig roles have become a main source of income. What’s wrong with this? On the surface, nothing. Below the surface, it may add to an already dire retirement savings crisis.
Why?
Most of these gig apps do not view workers as full-time employees and therefore do not offer any retirement planning or retirement saving options. The National Institute on Retirement Security claims that at least 65 percent of workers are saving less than required to meet their retirement income needs, making this a problem that cannot be allowed to multiply.
If employers aren’t offering retirement savings options and education, are workers even thinking about it? In the traditional world, even though some full-time employees do not take advantage of their employers’ sponsored retirement plans, they should know that they are available. Employees at companies that sponsor retirement plans are generally reminded and prompted about saving for retirement even though they may not be interested or are not enrolled in the plans. But are gig workers being properly informed about their need to save for retirement?
According to a report from PwC (2021), roughly a quarter of U.S. adults have no retirement savings at all and only 36 percent feel their retirement planning is on track. This likely means that most people are unable to or uninterested in looking for retirement solutions outside of their employer’s ecosystem. This presents even more of a problem for gig workers, since most of their employers do not offer proximate retirement saving solutions at all. Similarly, another obstacle for gig workers is having little to no money for long-term savings to contribute to retirement on their own after monthly expenses.
Most people do not realize being a gig worker requires excellent money managing skills beyond short-term budgeting. Many gig workers face challenges when it comes to establishing retirement accounts, accruing savings to cover healthcare expenses, and estimating taxes; some do not even take these elements into consideration until an emergency arises and it is too late.
So, how can the millions of gig workers get easy access to retirement options? Luckily, there is a parallel storm brewing that will intersect with the growing gig economy retirement problem and offer a pretty simple solution: embedded finance.
What Is Embedded Finance?
Embedded finance is the disruptive trend in financial services that makes traditional financial services capabilities available inside of consumer apps. These capabilities can include anything from education to saving, investing, and lending. So, if gig apps can embed any of these capabilities for the freelancers who look to their apps for income, then their retirement problem starts to look more like a retirement opportunity.
Imagine an Instacart shopper or Door Dash driver has easy access to a retirement savings and investing solution right next to the total income they earned today, this week, or this month. They can make an on-the-spot decision on whether to transfer all their income to their checking account, or allocate to an IRA built into the Instacart or Door Dash driver app. Or perhaps a gig app like Uber or Lyft could have an automatic allocation so that every time a driver completes a ride, a driver-selected percent automatically transfers to the investment account. That starts to feel like a traditional employer-sponsored 401(k).
The presence and proximate access to financial wellness on a gig app also brings a much-heightened sense of awareness to the need to save for retirement. This is where freelancers can be falling behind without the benefit of an employer nudging them toward financial wellness.
Benefits Go Beyond Gig Workers
The benefits of an embedded retirement savings program are not just for the gig worker. Gig apps stand to gain a tremendous amount of value, and not just from good will.
Gig apps are struggling with differentiation and loyalty problems. Consequently, many have started to offer promotions and extra-earning opportunities to increase engagement from the freelance workforce. For example, Uber offers daily incentives to its drivers like $10 extra for completing 30 trips during the work week, or $6 for a three-trip series.
Embedding investing and, specifically, retirement savings options could be a big differentiator on their own. However, offering incentives within those retirement savings features could be even bigger. Perhaps an app like Uber could deposit extra earnings into employees’ retirement accounts, which could incentivize the drivers but also make them feel a true connection to the Uber app, rather than alternating to an app like Lyft during spike hours when higher rates may be offered.
Eighty-nine percent of employees agree it is important for employers to offer financial wellness programs, according to research by John Hancock’s “Stress, Finances, and Well-being” report. Almost three-quarters of employees believe that employer-sponsored financial wellness programs have an impact on reducing financial stress, 66 percent say such programs make them more likely to stay with their employer, and 57 percent say a financial wellness program increases job productivity. It remains to be seen whether freelancers would favor apps that were actively helping them save for retirement, but the data definitely indicates a strong possibility.
If differentiation, loyalty, and engagement weren’t enough to push gig apps to offer retirement solutions, there is also the potential for additional revenue. Most embedded finance solutions share economics back to the embedder. So, if a traditional financial services firm were to embed saving and investing into a gig app, that traditional financial services firm is thereby significantly reducing their cost of client acquisition, which leaves room for a generous economic arrangement for the embedder.
Connecting gig workers with financial planners through the likes of embedded finance presents an opportunity for financial planners to gain new clients, provide necessary education to a new audience, and build retirement regimens tailored for gig workers. While the gig economy continues to grow, it certainly has not peaked yet, leaving an opportunity for financial planners to get ahead of the curve and take hold of this new generation of nontraditional employees in need of direction to secure their financial future. Embedded finance capabilities are one way to begin this conversation.
References
Mitic, I. 2022, February 17. “Gig Economy Statistics: The New Normal in the Workplace.” Fortunly. https://fortunly.com/statistics/gig-economy-statistics/.
PwC. 2021. “Retirement in America: Time to rethink and retool.” www.pwc.com/us/en/industries/asset-wealth-management/library/retirement-in-america.html.
