Longer lifetime payouts, coupled with a volatile stock market that featured two major recessions in 10 years and a fixed income market that has been providing lower yields since 1980 have placed a tremendous amount of stress on the funding levels state and local defined benefit (DB) retirement systems, according to a report from the National Association of Government Defined Contribution Administrators (NAGDCA).
The report notes that many state and local governments have made significant changes to their DB plan designs and benefits. Public-sector defined contribution (DC) plans, once considered only supplemental, are now an important part of public employees’ retirement readiness.
Due to their history of being viewed as supplemental, DC plans in the public sector have lagged behind their Employee Retirement Income Security Act (ERISA) counterparts in both innovation and participation. While participation in private-sector 401(k) plans has steadily increased with automation features, supplemental plans in the public sector have remained in the 30% to 50% participation range for decades. “[I]t is time for public-sector defined contribution plans to improve their plan design in an effort help public-sector employees achieve retirement readiness,” NAGDCA says in the report.
The report concedes that many states have anti-garnishment laws to prevent deductions from employees’ paychecks without their consent. However, 12 states have passed legislation to allow for auto-enrollment into public DC plans, and some public plan sponsors are in states that allow creative methods to circumvent anti-garnishment laws.
NAGDCA suggests by combining auto-enrollment with auto-escalation and increasing the initial default deferral rate, participants can significantly increase their savings over time.Case studies
The paper includes case studies. For example, the passage of H.B. 957 in Texas in 2007 authorized the automatic enrollment of newly hired state employees into the Texas Saver 401k plan. Beginning January 1, 2008, new hires and rehires with a break in service were auto enrolled at 1%. The participation rate pre-auto enrollment was 34%; in 2015 it was 56%. However, without auto-escalation of deferrals many participants remained at the 1% savings rate. The paper says with automatic deferral increases of 1% per year, capping at 6%, employees would have tripled their account balances.
In other case studies, NAGDCA found an auto-enrollment “stick rate” of more than 90%, even among employees that make less than $30,000 per year.
“Excuses for not beginning a savings program can be made at every phase in life—student debt, getting married, buying a house, having kids, paying for college, etc.—before you know it you are out of time. With so much burden of responsibility being placed on the individual today, it is imperative to change the system to better serve those that serve the public, by working to make auto-enrollment and auto-escalation programs available to all public sector employees,” NAGDCA concludes.The report, “Using Auto-Enroll to Improve Participant Outcomes,” is here.
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