Making State-Based Retirement Plans Work for Private Employers
Despite meaningful industry enhancements, millions of working Americans are still without access to an employer-sponsored retirement savings plan, signaling future consequences and spurring states to step in.
Since the Employee Retirement Income Security Act (ERISA) was passed in 1974, we have seen significant change in the retirement plan landscape: where traditional employer-sponsored defined benefit (DB) pension plans were once the dominant plan design, those plans continue to decline in both number and coverage, in large part due to corporate finance and market drivers. Today, defined contribution (DC) plans, including 401(k), 403(b), and 457 plans, once envisioned as supplemental savings plans, are now the primary or sole retirement plan for many workers. The responsibility for managing one’s retirement has shifted from the employer to the employee.
Although dramatic improvements have occurred to increase both coverage and asset sufficiency for employers that provide those plans, one striking statistic has not changed: only 48% of private employers in the US sponsor a retirement plan.1 That number has remained largely static since the passage of ERISA. The difference between large and small employers also extends beyond the provision of a plan to differences in participation, savings rates and cost.
Consider These Facts
While 88% of workers at large companies have access to a retirement plan, only 49% of workers at small business do.2
The average participation rate across all plan sizes is 80.1%. For the smallest plan segment (plans with less than $5 million in assets), participation rates dip to 74.5%.3
Savings Rate and Shortfall Projections
Across all plans, the average savings rate is 7.4%, while in the smallest plans it is 6.6%.4
In the largest plans, the median “all-in” fee is 0.25%, whereas the median “all-in” fee for the smallest plans is 1.24%.5
Federal Stops and Starts Have Spurred State Action
While there has been progress in increasing coverage and savings sufficiency in larger employer-sponsored plans, smaller businesses, a critical area of job growth, have to a great extent been left out. The SECURE Act’s provisions on “open” multiple employer plans (MEPs) — also known as pooled employer plans (PEPs) — and the consolidated Form 5500 that can be used for “cookie cutter” plans are already having a positive impact on the small employer market and we expect plan access and coverage to increase significantly over the next three to five years due to the creation of PEPs.6
As Washington pursues next steps, state governments are looking ahead and taking action. A rising generation of retirees without adequate savings (if any) could trigger a savings shortfall that would put tremendous strain on state economies. Driven by this shortfall scenario, nearly 40 states have either considered or enacted legislation that requires employers to do one of the following:
Offer a retirement savings vehicle
Study how best to structure such a plan based on existing Department of Labor (DOL) regulations
While a federal solution offering a uniform set of standards would be the most streamlined approach to addressing retirement saving and spending challenges, it is easy to understand why state and local governments are taking steps to fill the void. Those states and cities that decide to take action should consider the following principles:
Structure Programs for Success
Ease of implementation and administration, plus streamlined investment options, are obvious but important factors in structuring programs for success.
Ensure that investment strategies account for, balance and manage four key risks affecting participants’ ability to fund their retirement:
Shortfall: Not having enough money to fund retirement
Longevity: Outliving one’s savings
Inflation: Eroding purchasing power from one’s retirement portfolio over time
Volatility: Losing value of one’s retirement portfolio due to market downturns
Beyond addressing risks, ensure they aren’t managed in isolation — as such an approach may satisfy one dimension of the risk equation while jeopardizing others. For example, a program that focuses on preserving capital may overlook and ultimately exacerbate longevity risk and inflation risk.
Reduce Opportunities for Failure
Participant and plan sponsor failures should be made more difficult. These programs should focus on reducing leakage, for example, by making loan repayments easier and plan-to-plan transfers more operationally efficient and seamless. Use automaticity to increase participation (auto-enrollment) and savings rates (auto-escalation) and streamline investment decisions. Achieve the latter by using target retirement strategies that both meet the DOL’s qualified default investment alternative (QDIA) regulations and align investment risk with a participant’s retirement date.
In 2017, OregonSaves became the first state-based auto-IRA. By the first quarter of 2021, OregonSaves enrolled more than 100,000 of the 600,000 private-sector employees without access to an employer-sponsored plan, managing nearly $100 million7 of participant savings (an average contribution rate of 5.6 percent of salary).8
Employers aren’t permitted to contribute to the plan, but they are mandated to enroll their employees if no other retirement savings program is offered. As with all auto-IRAs, participants can opt out at any time.
Illinois and California were the second and third states to begin implementation of state-based programs. Illinois
Secure Choice launched a pilot in the spring of 2018 and aims to extend coverage to an estimated 1.2 million eligible workers.9 At the end of the first quarter of 2021, Illinois Secure Choice had almost $55 million of participant contributions. California’s plan, CalSavers, piloted in the fall of 2018, is also focused on scale.10 . Although the program is still not fully deployed in terms of required employer enrollment, at the end of the first quarter of 2021 CalSavers had $55 million in participant savings.11
Additional states and cities are following suit, suggesting a rise in regional plans over the next few years.
A National Solution
As ambitious and admirable as the state plans are, they are not without gaps. Employers doing business across states and workers living and working in different states — or those who simply move out of state — face administrative complexity. Alternatively, a federal solution with nationally applicable rules could solve for mobility and portability issues, while achieving the scope and scale to efficiently serve all American workers. This federal approach should consider how to coordinate with established state-based plans in serving participants’ retirement savings and spending objectives.
In December 2017, U.S. Rep. Richard Neal, now chairman of the House Ways and Means Committee, introduced the Automatic Retirement Plan Act which would require all employers (with limited exceptions) to auto-enroll and auto-escalate workers into a DC plan. The bill also provides tax credits to small employers to cover administrative plan costs and any employer contributions made to the plan, as well as furthering the accessibility of PEPs. That legislation will be reintroduced this year and will expand to allow employers to offer a 401(k), SIMPLE plan or IRA. This type of comprehensive federal solution, if enacted, could serve as the retirement savings standard, broadening access to all workers and replacing the need for further state action.
Workers in the United States are increasingly responsible for and challenged by funding and managing the retirement phase of their lives. These challenges are heightened for those without access to employer-based, tax-preferred savings programs. While progress has been made at the federal level through the creation of PEPs, more can be done to ensure that all working Americans have access to employer-sponsored retirement plans. Until further federal legislation is enacted, states are moving rapidly to close the access and coverage gap. It is yet to be seen whether these state initiatives energize federal lawmakers to concentrate resources around a national retirement savings solution, one that is broadly accessible and offers consistent coverage.
12017 Employee Benefit Summary, Bureau of Labor Statistics, US Department of Labor; https://bls.gov/ncs/ebs/benefits/2017/ownership/private/table01a.html 2Retirement benefits: Access, participation, and take-up rates, private industry workers, U.S. Bureau of Labor Statistics, National Compensation Survey (March 2018). 3PLANSPONSOR DC Survey 2020. 4Ibid.. 5ICI and Brightscope, The Brightscope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2017 (2020). 6The Employee Benefits Research Institute estimates that coverage rates due to PEPs will increase from 70335000 in 2018 to 71879971 in the next year. This modelling was based on 2018 Form 5500 numbers and a Prudential Financial survey of small employers interest in offering PEPs (with a 25% opt out rate). 7 Investment Company Institute, State Sponsored Plan Chart. April 26, 2021. 8Sellwood Consulting, 2021-03-Program-Report-OregonSaves-Monthly, https://www.oregon.gov/treasury/financial-empowerment/Documents/ors-board-meeting-minutes/2021/2021-03-Program-Report-OregonSaves-Monthly.pdf.
9The Daily Herald, “How Illinois retirement program works (and is it a good idea?),” July 8, 2018, https://dailyherald.com/news/20180707/how-illinois-retirement-program-works-and-is-it-a-good-idea-. 10. Investment Company Institute, State Sponsored Plan Chart. April 26, 2021. 11. Ibid.
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