By Mark Wolf
Estimates are that more than a third of the American workforce lacks access to a pension system from their employer and many businesses, especially smaller ones, can't afford to underwrite one for their employees, who may have to depend on Social Security for much of their retirement income.
So what if states made it easier for all businesses to start a plan and made employees affirmatively opt out if they didn't want to participate?
That was the theme of the closing plenary session at the NCSL Capitol Forum.
“We have a very robust private pension system in this country, roughly $25 trillion under management (for both public and private sector employees),” said J. Mark Iwry, a tax policy adviser in the U.S. Treasury Department, who has been called the “father of auto-enrollment.”
The estimated one-third of U.S. workers who don't have access to a voluntary retirement system at work can save the through an Individual Retirement Account but, Iwry said, “the take-up rate might be 1-in-10, but if you auto-enroll people, make it an opt-out, it's 9-in-10. “There are some peopel who shouldn't participate, very low income, people in very dire straits but those are the exceptions. Most low income people would benefit but they don't do it.”
One solution, Iwry said, is the “automatic IRA,” a concept that has been around for many years. Under an automatic IRA with an opt-out provision, employees would contribute to an IRA through automatic payroll deduction. The funds would require no employer contribution and the funds would be managed by a private firm with an emphasis on safe investments.
“A single federal system would be ideal but Congress hasn't acted,” said Iwry. “California, Oregon, Illinois, Connecticut and Maryland have enacted it, sometimes calling it 'Secure Choice' and Washington and New Jerey have enacted another alternative,” he said. “Other states are considering other models.
“The employer who has chosen not to sponsor a plan has to be the focal point of our sensitivity. What they have to do is minimal: Just pass through the payroll portion of it, whatever portion the employee wants, to the employee’s own IRA. We hope to end up promoting more adoption of employer plans, tax qualified plans, partly from employers who are starting out with automatic deduction and seeing their employees like it.”
Senator Kevin de León, president pro tempore of the California Senate, said his state's Secure Choice Retirement Savings Plan, which goes into effect Jan. 1, “will help nearly 7 million hard workers get on the pathway to self-sufficiency when they retire.”
Secure Choice, de Leon said, “mandates that workers who lack a defined benefit or contribution plan at their place of enmployement will be automatically enrolled. It's not opt-in, it's automatic. Those who choose not to partricipate can opt-out.”
The plan requires at least 3 percent of employees' pay to be automatically deducted and invested in a low-risk fund, primarily treasury bonds, administered by a private entitly. Secure Choice, he said, “will be low-cost and portable, seamlessly moved from job to job without complex paperwork.
“People say, 'If anyone can set up their own IRA, why should the state do it for them?' I say there is no Charles Schwab, no T. Rowe Price in the hood. The financial products they sell are marketed to a very specific universe. The data shows current options aren’t enough. Secure Choice is about personal responsibility, being mindful. It's not a handout, it's a hand up for people who choose to save.
“There is nothing more powerful for financiial literacy than when person opens up that quarterly statement and sees the power of compound interest over time. We are creating a generation of new savers throughout the country who will rely less on government. Whether you are a Republican or a Democrat, you will pay the consequences in state budgets when you have to subsidize those who live in poverty as senior citizens.
“Retirement insecurity is a bipartisan issue. It's an American issue.”
Alane Dent with the American Council of Life Insurers, said any “automatic IRA" plan must be established by state law, insure the security of savings and of workers' rights.
She said access to retirement savings for low-income people “is very important, so putting withdrawal limits on that is something that needs to be thought through." She also said startup costs are an issue states need to consider, noting that California's startup costs will be between $75 million and $135 million, that Connecticut expects $45 milliion in startup costs and Minnesota is looking at between $27 million and $32 million.
Mark Wolf is editor of the NCSL Blog.