State-Facilitated Retirement Savings Programs for Private Sector Workers

9/26/2018

 Retirement Security Initiatives in the States

Most Americans are not saving enough for retirement. The problem is especially severe among small-business employees, low-income workers and communities of color. On the brink of a national retirement security crisis, state lawmakers are stepping up with a spectrum of innovative solutions.

Retirement planning experts have traditionally used the analogy of a three-legged stool to describe the common sources of retirement income: Social Security, employer-provided pensions and individual savings. But the stool has grown wobbly for many workers, particularly in the private sector. For one thing, fewer employers offer traditional pensions, which puts the onus on workers to save more themselves. Another issue is changing demographics—people are simply living longer and need to save more money as a result. A third concern: Just how secure is Social Security?

As state officials stare down the prospect of mounting costs if their citizens retire into poverty, they’re looking carefully at how to boost retirement savings. Should they create and facilitate new retirement savings programs for private sector workers or encourage participation in existing plans? One important consideration is how to take full advantage of the options the private financial services market already supplies. It’s a balancing act as legislators try to promote employee savings, limit burdens for employers and manage legal and financial risks for their states.

The Scope of a Looming Crisis

According to the AARP, half of American households risk financial insecurity in retirement, leaving them unable to afford basics such as food, medicine and utilities. Many who have remained solidly middle class throughout their working lives may face financial hardship in their senior years.

A new research report finds that the retirement savings levels of working-age Americans remain deeply inadequate despite economic recovery since the Great Recession. An analysis of U.S. Census Bureau data reveals that the median retirement account balance among all working individuals is $0. The data also indicates that 57 percent (more than 100 million) of working-age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension. That leaves Social Security as their main or only source of retirement income. Questions about its long-term solvency aside, Social Security was never designed to serve as a retiree’s sole source of income.

Numerous factors are driving the retirement security crisis, from shifting demographics and structural changes in the American workforce to limited financial literacy.

While retirement ages tick up slowly, they are not keeping pace with increasing life expectancies. As a result, Americans have to finance retirement over a longer period of time. They may invest too conservatively, yielding insufficient returns to guarantee a comfortable retirement. Likewise, consumer debt, large or unanticipated expenses and inflation can all threaten long-term savings. Few workers are sophisticated financial experts; indeed, many lack basic knowledge about personal finance. Even the most determined savers may find the complexities of today’s financial markets difficult to navigate.

Workers are 15 times more likely to save if they have access to a payroll deduction savings plan through their employers. But 68 million Americans don’t have access to a retirement savings program at work, the U.S. Department of Labor estimated in 2015. The likelihood of having a workplace retirement plan varies considerably by geography and employer size, not to mention worker earnings, education, race and ethnicity. Those with lower rates of access to on-the-job savings include small-business employees; part-time, temporary and seasonal employees; members of minority groups; and people with low to moderate incomes. Offering such plans may carry costs or burdens that small employers, in particular, are reluctant or unable to bear.

State, local and federal policymakers want to ensure that, after a lifetime of hard work, retirees can maintain a dignified standard of living. It's also going to cost taxpayers down the road if people reach old age without sufficient resources.

States Expand Access to Retirement Savings for Small Business Employees and Others

Since 2012, 40 states have studied proposals for state-facilitated savings programs or considered or adopted legislation to create them. Ten states have now enacted legislation to expand access to retirement savings for non-governmental workers.

California, Connecticut, Illinois, Maryland and Oregon have all adopted auto IRA models. These state-facilitated retirement savings programs feature IRAs that receive automatic deposits from workers’ paychecks. These “Secure Choice” programs, as they’re sometimes known, require employers of a certain size to offer their employees a way to save for retirement at work. Employers who don’t want to sponsor their own retirement savings plans can use the state IRA. It is voluntary for workers, who decide how much to put away and how to invest it. Employers don’t contribute. Secure Choice programs are run via public-private partnership, and employee funds are pooled and professionally invested by the financial industry. New York adopted a payroll deduction IRA program in 2018, which will be voluntary for both employers and employees.

New Jersey and Washington have adopted “marketplace” arrangements, where small businesses and individuals can comparison-shop for savings plans from financial services providers. These online clearinghouses are voluntary for employers and employees.

Vermont and Massachusetts have adopted Multiple Employer Plans, which involve aggregating employers who elect to participate to offer a 401(k)-style retirement plan. This alternative allows small businesses to jointly offer plans and is subject to ERISA regulation, but can permit higher levels of savings and employer contributions. The Massachusetts arrangement is limited to nonprofit employers with 20 employees or less.

Oregon leads the group in implementation, with its OregonSaves initiative beginning a pilot in 2017 and rolling out in phases over the course of 2018, starting with larger employers. New York adopted a Secure Choice program in its budget in the spring of 2018 that will be voluntary for both employers and employees. Vermont is the most recent adopter of an innovative Multiple Employer Plan (MEP) arrangement. 

The various plan structures and features have tradeoffs. A voluntary marketplace, for example, is an attractive option in part because it capitalizes on existing retirement plan products and services and could be less disruptive for providers. But it may not yield enough participation to generate significant increases in coverage to make the plan self-sustaining.

Policymakers face a host of tough questions. What is the best way to reach those on the financial fringes—low-income, minority or gig-economy workers? How can states encourage adequate retirement savings without demanding too much of cash-strapped workers, who have little set aside for emergencies. Could employers drop existing plans to send workers into state-sponsored alternatives? Will employees save less as a result? Will small account balances make plan administration inefficient? What is the right type and number of investment options? How many is too many when it comes to ease of use? And what is the appropriate state role for enhancing financial literacy and general investment education?

DC PR MP GU AS VI AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA --> KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WYLaws Creating State-Facilitated Retirement SavingsPrograms for Workers in the Private Sector: 2012-2018

State Implementation Efforts

  • California is making significant progress hiring vendors needed to implement its programs. In August 2018, the CalSavers board selected Ascensus to administer its new retirement savings program. The board anticipates the program will open with a pilot program in late-2018 and officially open for statewide enrollment in 2019. The program will begin with a three-year phased roll out of the employer mandate by size, beginning with the largest employers. 
  • Connecticut's search for an executive director remains open. The Connecticut Retirement Security Authority has currently decided on a Jan. 1, 2019 implementation date with a phased roll-out of the program.
  • Illinois launched its first pilot on May 15, 2018. The program is being rolled out in waves. Employers with 500-plus employees will be enrolled starting in November. The second wave, in July 2019, will include employers with 100 to 499 employees, and the final stage will take place in November 2019 and include employers with 25 to 99 employees. According to the state treasurer, if the program is a hit and more employers and employees inquire about participating, they may pursue expanding the program down the road.
  • Massachusetts’ program launched in October 2017 and is now open for enrollment. Under the MEP structure, the Office of the State Treasurer and Receiver General—as CORE Plan Sponsor—assumes most administrative responsibilities on behalf of participating employers and their employees.
  • Maryland’s program is expected to start operations sometime in mid-late 2019, with statewide program implementation by 2020. Its executive director was named in April 2018.
  • New York adopted legislation to create its voluntary program in April 2018. The legislation calls for the plan to be developed in roughly two years, though it could be delayed by as much as an additional year.
  • Oregon has now opened its program to all eligible employers in the state. In July 2018, the OregonSaves program revealed enrollment numbers for its first full year of operation. According to state authorities, the combined savings of the first groups of participating savers is already approaching $5 million. In addition, hundreds of thousands of additional eligible workers are on track to join as the program continues to expand statewide over the next two years. The registration phases are now completed for employers with Oregon workforces between the size of 50 and 99. The next signup deadline is Dec. 15, 2018 and applies to employers with between 20 and 49 workers. Support for Oregon’s retirement savings program remains high, according to a new survey.
  • Vermont is making significant progress toward hiring vendors they will need to implement their programs. The program will launch in January 2019.
  • The Washington State Retirement Marketplace opened for business on March 19, 2018. The employer registration timeline is based on the number of employees. By 2020, employers with four or fewer will have to register.

Federal Developments

Following failures of pension plans during the 1960s, Congress passed the Employee Retirement Income Security Act in 1974 as a framework of consumer protections for employer-provided retirement, health and welfare plans. It generally doesn’t cover public sector employers, religious institutions or IRAs set up by individuals.

Known as ERISA, the act provides important consumer protections for private sector employees. It also carries regulatory burdens for their employers, who must comply with stringent reporting and disclosure rules, and it imposes fiduciary responsibilities on retirement plan sponsors and providers.

States exploring retirement security legislation have faced uncertainty about the broad federal pre-emption provisions contained in ERISA. In 2016, the U.S. Department of Labor issued several pieces of guidance on how states can address retirement insecurity, including a final regulation meant to provide clarity for states interested in sponsoring auto-IRA plans, such as the Secure Choice model mentioned above. The department followed up with a rule aimed at certain cities and local governments that want to set up similar programs.

The rule for state-sponsored plans provided a limited safe harbor exemption from ERISA if a program meets certain requirements. Among them, employees must be allowed to opt out, and employers, who cannot make contributions themselves, must play a limited administrative role. The rule also required certain employee protections.

Some members of the financial services industry expressed concern that the regulation created an uneven playing field in the retirement plan marketplace. Under existing Labor Department regulations, private providers cannot offer similar savings arrangements with the types of auto-enrollment and auto-escalation features the department’s regulations would have permitted for state-facilitated plans. Other industry concerns relate to unintended consequences, like reduced economies of scale and less incentive for innovation among private providers.

Using the Congressional Review Act, which permits federal lawmakers to roll back regulations from the last months of the previous administration, Republicans moved swiftly during the first weeks of the new session in early 2017 to repeal the Labor Department rules that green-lit state and locally facilitated auto-IRA plans. Citing an unwarranted pre-emption of state innovation, NCSL joined a bipartisan group of state treasurers and other groups in opposing the state rule rollback. As the number of workers who lack sufficient retirement savings grows, the strain on public finances means states need the flexibility to develop creative solutions, NCSL said in letters to the House and Senate. President Donald Trump signed resolutions nullifying the rules for municipalities and states.

On Aug. 31, 2018, Trump signed an executive order that spurs the U.S. Department of Labor to push forward several changes to how retirement plans operate, including further consideration of MEPs. There is also ample federal legislation on this topic.

Even with uncertainty about the federal legislative and regulatory landscape—and a contentious political climate—state leaders continue to forge ahead with retirement security efforts.

Additional Resources