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.
Debunking Myths
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.”
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