Government-Sponsored Retirement Plans—Coming to a State Near You?
posted by Fisher 401(k) March 30, 2017
With worry over the retirement savings gap becoming a greater national concern, more than half of all states in the U.S.—as well as the federal government—have introduced proposals to create government-sponsored savings vehicles for American workers without access to an employer-sponsored retirement plan. Among all working households ages 25 to 64, the median retirement account balance is only $3,000—far below what retirement professionals suggest is needed to supplement retirees’ social security incomes. This massive gap in retirement savings leads to a projected national shortfall of $6.8 to $14 trillion.1
Full-time workers are more likely (77%) than part-time workers (42%) to have access to a company-sponsored 401(k).2 However, at least half of all workers don’t have access to a retirement plan at work,3 and small businesses make up more than 99% of all businesses in the U.S.4 It’s easy to see why such a vast retirement savings gap exists; how to fill that gap is a different problem.
Cue federal and state governments attempting to tackle that problem. In 2015, the federal government started the myRA program to promote retirement savings for workers without access to a company-sponsored 401(k). There are no fees and low risks, but the contribution rates are far lower than that of a company-sponsored 401(k), and investors have no choice in where to invest their money. Savings are backed by the United States Treasury, and accounts earn interest at the same rate as investments in the Government Securities Fund (a growth rate of 2.5% is assumed).
But states are taking proposals a step farther, to varying degrees. The majority are still in the process of studying the feasibility of a plan and writing legislation, but a handful of states have implemented or will implement legislation later this year.
Some state-run plans are already in place
- California implemented the California Security Choice Retirement Program, which is currently under development. The law requires businesses with five or more workers and no employer-sponsored retirement plan to participate in the program, with individual employee retirement accounts managed by a state-selected financial company. Contributions the first three years are invested in U.S. Treasury bonds or similarly safe investments.5 The law establishes an automatic employee savings rate of 3% of salary, with automatic escalation of 1% each year (to a maximum of 8%). And although businesses are required to participate in the program, employees can opt out of participating.
- Washington’s and New Jersey’s plans will operate similarly to each other in that they’ll set up small business retirement marketplaces where businesses can shop for pre-screened, low-cost, private-sector retirement plans. Employer participation in the Washington program is voluntary, with the state having done much of the legwork in researching the plans. In the Washington plan, employers can also offer matching contributions (of up to 3%) like any other 401(k). New Jersey’s law requires businesses with 25 employees or more to participate.
- Illinois’ Secure Choice Savings Program features a state-run investment pool and automatic enrollment with paycheck deductions of 3% for employees who fail to make an investment election. For businesses that have at least 25 employees, have been in business for at least two years, and don’t offer an employer-sponsored retirement plan, participation is mandatory.
- The Oregon Retirement Savings Plan, set to debut in mid-2017, is similar to the Illinois program in that it develops a defined-contribution retirement plan in which the funds are pooled and professionally-managed. Employees can opt out of the plan entirely if they wish. However, employers who don’t offer their employees a 401(k) must make the Oregon state plan available to them.
- Connecticut’s approach is a little more unique: Employers with only five or more employees would have to offer an automatic IRA with a default contribution rate. Upon retirement, employee retirement savings would be paid out as a lifetime annuity (a fixed sum of money paid out each year) or, if the employee chooses, a lump-sum payout. The Connecticut plan offers a guaranteed rate of return, and is backed by survivor and insurance benefits.6
State-run retirement plans create advantages for both the employer and employee
Some employers may be wondering what benefit a state-run plan can provide over simply starting their own employer-sponsored retirement plan. State-run plans offer some advantages and disadvantages to both workers and retirees.
Some advantages include:
- Minimal cost and risk to the employer.
- State-run boards and contracted third parties relieve business owners of their fiduciary duties to their employees.
- Employees in states with government-run retirement plans now have an investment vehicle to save into if the business they work at does not offer a retirement plan.
Some disadvantages include:
- State-run plans do not offer the same level of flexibility and service that can be built into a company-sponsored retirement plan, which can be optimized to fit that business’s unique needs.
- Some state-sponsored plans may not offer the larger contribution limits—and therefore tax savings—that a 401(k) can.
1 National Institute on Retirement Security. The Retirement Savings Crisis: Is it Worse Than We Think? June 2013.
2 Transamerica Center for Retirement Studies. Annual Transamerica Retirement Survey of Workers. August 2016.
3 Brookings Institute. Structuring State Retirement Saving Plans: A Guide to Policy Design and Management Issues. September 2015.
4 U.S. Small Business Administration Office of Advocacy. Small Business Profile. 2016.