The coverage gap is the most
serious problem in the private sector retirement system.
At any moment in time, less
than half of private sector workers are offered any type of retirement plan by
their employer. Since people tend to only save through organized savings
mechanisms, those without coverage do not accumulate retirement assets.
Policy makers have
recognized the coverage problem and have proposed a federal “Auto-IRA” program
under which employers without a plan would be required to automatically deposit
a percentage of their employee’s earnings in an individual retirement account.
The employee would retain the ability to opt out. Unfortunately, no such
legislation has been enacted at the federal level. Instead, the states have
leapt into the breach. California, Connecticut, Illinois, Maryland, and Oregon
are in various stages of developing state Auto-IRA programs. Oregon’s program
is actually up and running.
Massachusetts has taken a
different tack. In 2017, the state launched a multiple-employer 401(k) plan
open to nonprofits with 20 employees or fewer. This initiative is known as the
Connecting Organizations to Retirement (CORE) plan. The state takes on the bulk
of the administrative and investment responsibilities. The idea is to relieve
small employers of the administrative and fiduciary burden of offering their
own plans, and, through economies of scale, reduce the fees and expenses
generally associated with running a small 401(k).
Once an employer chooses to
participate in CORE, its employees are automatically enrolled in the plan. An
employee can then opt out if he chooses not to participate. The employer can
match the employee contributions or make contributions regardless of whether or
not the employee contributes. CORE automatically escalates the employee’s
contribution; for example, the initial contribution rate is increased gradually
each year until it reaches a specified ceiling.
Enrolling employees in a
low-cost 401(k) has a number of advantages over the IRA model — primarily,
employees can contribute more than they could to an IRA and their employer can
match their contribution. Participants also have the protections offered under
the Employee Retirement Security Act of 1974 (ERISA)
The downside of the
Massachusetts approach is that it relies on each employer to make the decision
to participate. In contrast, the Auto-IRA approach requires each employer
without a plan to automatically enroll their employees. Moreover, the
Massachusetts plan is limited to small nonprofits, whereas the Auto-IRA
approach targets all employers without a plan.
I am skeptical that the
voluntary approach will work, but am happy to be proved wrong.
here for the original article from Market Watch.