States Stepping Up With Private Retirement Savings Plans
After decades of watching the federal government and private sector do little to help low-income workers prepare for retirement, more and more states are stepping up to offer greater access to private retirement savings plans.
The states are focusing on helping some of the estimated 57 million workers who do not have access to employer-sponsored plans, such as 401(k)s, to save for retirement.
This is happening mostly via employer-enabled, portable Roth individual retirement accounts. In these plans, the number of investment options is usually limited, and employer contributions are not allowed. This keeps the plans simple and low-cost.
States that have taken action are actively addressing this grim fact: Some 40% of Americans will run out of money during their retirement, according to the Employee Benefit Research Institute. Most of these people have no significant retirement savings other than Social Security, often because their employers didn’t offer a workplace pension or retirement plan.
On average, one in five senior households rely on Social Security for at least 90% of their income, says Angela Antonelli, a research professor and the executive director of the Center for Retirement Initiatives at Georgetown University.
This is costly for states: Pennsylvania taxpayers, for example, can expect an additional $14.3 billion in state spending, such as for Medicaid, due to insufficient savings, according to research by the Pew Charitable Trusts in consultation with Econsult Solutions Inc. The researchers calculated this number in 2020, using a 2015 baseline with data projections through 2030.
States Stepping Up
Last year, Maine became the 15th state to facilitate access to private, no-frills retirement savings plans for predominantly low- and moderate-income workers, including those who hold more than one part-time job. That same year, Colorado and New Mexico announced that they intend to cooperate on the administration of a program for the workers in their states, with the potential to become the first multi-state program in the country for an IRA with automatic enrollment. This year, Hawaii passed legislation authorizing a similar program that is currently awaiting the signature of the governor.
All this builds on what Oregon started in 2017, when it became the first state to enroll workers. As of mid-2022, Oregon has signed up about one of every six businesses in the state.
Plan advisers, plan sponsors, fintechs and providers of low-cost investment vehicles are taking note of the traction gained by the state programs, which as of March 31 collectively administer $462 million in assets in more than 460,000 funded saver accounts with more than 61,000 registered employers.
The success of these state programs is debunking some long-held myths in the retirement industry, says Antonelli.
These myths include the ideas that low- and moderate-income workers can’t and don’t want to save; employers don’t want to offer savings opportunities for workers; and low- and moderate-income savers are not an interesting market segment for providers of savings and investment plans.
“The private sector and the federal government didn’t solve this problem for 40 years. Now states have been successful in filling the gap and showing this is an opportunity, a real market. The private sector is now rising to the challenge of being innovative and coming up with products that can help meet this need,” she says.
Antonelli adds: “Retirement plan providers have long ignored the small-employer market and their workers. Now that they are seeing the interest from both employers and workers to save, there is more robust innovation and competition in the private market to offer these employers more attractive, simple, low-cost plan options as alternatives to a state program.”
Katie Selenski, the executive director of California’s program, CalSavers, says that sometimes it’s more than just the private sector finally meeting a need. In some cases, the state mandates have actually boosted the business of companies that are unrelated to the programs. California mandates that employers with at least five employees that do not offer a private retirement plan must join the state program and facilitate employees’ access to participate.
As a result of the new mandates in California and other states, private plan providers are increasing their marketing as they also create simpler, more affordable plans that may be attractive to small businesses.
“We’re starting to see that some employers are choosing those plans instead of joining CalSavers,” says Selenski. “Any new access to workplace-based saving is a good thing from our perspective. Whether that’s through CalSavers or new private plan formation—it’s all advancing the mission of retirement security.”
Showing by Doing
Besides debunking myths, state-facilitated plans are demonstrating how some of the design principles that have been debated by the retirement industry play out when they are put into action.
“For years, the industry has been discussing the appropriate level for a default contribution rate, the benefits of simplified investment selections and the effects on participation and savings levels of using auto-enrollment and auto-escalation,” says Antonelli. “States have shown by doing that these features actually work. You can set a default contribution level at 5% and then use annual auto-escalation to increase the contribution level, and most savers will go along.”
OregonSaves, for example, has auto-escalated its contribution level for savers four times since the program began, says Antonelli. “Now the average contribution rate stands at 6.3% and some savers are contributing as much as 9% to their accounts,” she says.
Joshua Gotbaum, the chairman of MarylandSaves, Maryland’s program, and a guest scholar in economic studies at the Brookings Institution, notes other advantages. “State auto-IRAs are showing you can have smart, affordable automatic savings programs without requiring employers to pay for them or take on legal responsibility.”
“We want retirees to be protected, but most employers are no longer willing to take on fiduciary responsibility, nor are most financial firms,” adds Gotbaum, an active advocate for these programs for more than a decade. “We’re showing that you can have fiduciary protections without the employer being the fiduciary.”
Usage, Fees and Advisers
A look at the numbers shows that average account balances vary by state, but Massena Associates calculates an average of $940 in three states that are past the pilot stage.
In the CalSavers program, the average account balance is $807, but long-term that number can look different. Selenski says, “It’s important to keep in mind that the majority of our accounts are very new. Some of our early adopters from 2019 have more than $10,000 saved to date.”
John C. Scott, retirement savings project director at the Pew Charitable Trusts, studies the state programs and tracks their progress. He says most states provide about four investment options: a money market fund, a bond fund, a stock fund and a target-date fund. In California, savers have five options on the menu, with the default being a suite of target-date funds.
Fees also vary across the states, but they are generally very low. Georgetown collects data about fees, shown state by state.
In California, Selenski says, “the all-in fee is 89 basis points for savers in the default target-date fund. That’s composed of nine basis points for the underlying investment, five basis points for our state government administrative fee, and 75 basis points for the administrative fee for Ascensus, our program administrator. There is no flat dollar annual fee.”
She continues: “Other states operate with a hybrid model that includes both annual flat dollar fees plus the asset-based fees, but California is currently charging only the asset-based fees. When you consider the average account balance of $807, that means that our average participant is paying a total of $7 per year. Employers pay zero fees.”
Because these accounts are IRAs, the maximum amount that participants can save is $6,000 a year for those under age 50 and $7,000 for those over age 50. In traditional employer-sponsored DC plans, savers can put in far more. According to Selenski, the caps are sufficient for the low- and middle-income savers targeted by the programs.
Fidelity, Vanguard, Lincoln Financial Group and Newton Investment Management (for an ESG fund, which, to date, California is the only state to offer).
More Marriages in the Pipeline?
Scott expects more states to join forces to reduce costs for administering auto-IRA programs, following in the footsteps of Colorado and New Mexico.
“I think this is the next thing. We have a lot of small states. To achieve economies of scale, they’ll be joining forces, much like states have done for 529 programs” says Scott, referring to programs to administer 529 college savings plans.
Selenski suggests that California may be open to partnerships with other states if the time is right and operational complexities are resolved.
“We’re watching those multi-state discussions really closely, and we’re a part of them. We want all Americans to have access to the kind of program that we’re providing in California,” she says. “We know that when people have access to a way to save via payroll deduction—that ‘set it and forget it’ model—they are 15 times more likely to save. They want to save. And small businesses want to help their employees do well.”
The concept of state-sponsored automatic IRAs was originally outlined in a paper published in 2006 by David C. John, then of the Heritage Foundation, and J. Mark Iwry at the Brookings Institution. The authors eventually gave testimony to Congress in 2008 supporting a national version, and presidential candidates began to campaign on ideas about greater access to savings plans and retirement security. But then policy priorities shifted at the federal level, and no action was taken.
This is where Angela Antonelli and the nonprofit Center for Retirement Initiatives she leads at Georgetown came into the picture, becoming instrumental in helping build momentum for states to establish their own programs.
The CRI was founded in mid-2014 to bring states together, engage them on the topic and provide technical assistance in designing and implementing state retirement savings programs. It also actively encourages the development of multi-state partnerships.
In 2019, the CRI published a paper about the value of multi-state partnerships. According to Antonelli, that paper led to all future bills including “partnership-authorizing language.” It also spurred states that already had programs at the time to go back and secure such authorizations from their legislatures.
John C. Scott, of Pew Charitable Trusts, has studied employer reactions to state programs. According to Pew research published in 2017, 52% of businesses without retirement plans said they would start their own if asked to choose between doing so and enrolling workers in a state-sponsored auto-IRA.
Meanwhile, just 13% of businesses with plans said they would drop current offerings to enroll workers in a state program, Scott says. Since they started, state programs have seen significant employer demand: In Oregon, one in four participating employers signed up at least three months before their deadline, according to a report by Pew.
Other research, based on data collected in federal Form 5500 annual reports, suggests that state-wide savings programs could be encouraging businesses to sponsor their own plans.
“In terms of policy, these programs are a good thing for society and for workers. Typically, these are younger workers starting out, and they don’t have benefits at their jobs. Getting them into the savings system early means they will have more money for retirement. Eventually, a lot of these workers will move from the state programs into a corporate-sponsored program, and they’ll bring their account balances and be better savers,” says Scott.
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