Financial Wellness – More states are entering retirement savings business

Kern Business Journal
August 2015

Illinois and Washington already have approved state-run retirement plans for employees of private companies. Oregon is following the trend. And at least 25 other states, including California, are studying the feasibility of starting programs.

Small business owners must brace for the likelihood that state governments soon will be operating payroll-deducted retirement savings programs for workers who now do not have access to 401(k) and similar programs.

Despite objections from small businesses that these programs will inflict unwanted paper work on companies, states are moving forward with savings plans. Business interests’ only recourse is to work with legislators to ensure plans are safe repositories for workers’ money and relatively uncomplicated to administer.

According to the Government Accounting Office, half of the U.S. workforce, or an estimated 78 million Americans, do not have access to employer-sponsored retirement plans. Only 14 percent of employers with fewer than 100 employees provide 401(k)s or other retirement savings plans.

The Center for Retirement Research at Boston College estimates that 53 percent of working-age households are at risk of being unable to maintain their pre-retirement standard of living after they stop working. Today, 43 percent of retirees rely on Social Security, with an average monthly benefit of $1,300, for 50 percent of their retirement income.

Recognizing that many Americans will not have sufficient funds to live independently in retirement, the Obama administration last year launched the myRA (My Retirement Account) program, which allows workers to contribute post-tax money into a portable, government-backed account.

But the federal program, so far, has seen little success. Investments pay relatively low returns. And low-pay workers have little “discretionary cash” to place into a myRA account.

Studies reveal that the best retirement savings results are obtained when contributions are made through automatic payroll deductions. When large employers have automatically enrolled workers in 401(k) plans, participation has risen from 70 percent to almost 90 percent.

States’ involvement in the retirement savings campaign stems from more than altruistic concerns about the citizen welfare. Legislators fear states, local governments and taxpayers will have to pick up the public assistance tab for Americans who retire without sufficient income.

Noting Social Security is a critical piece of the puzzle, but never intended to be the sole source of retirement income, AARP has launched a Work and Save Initiative to push legislatures to create programs to encourage retirement savings.

In January, Illinois Gov. Pat Quinn signed a law that would require businesses with 25 or more employees to allow workers to contribute to a state-run IRA retirement plan by 2017. In May, Washington Gov. Jay Inslee created the Washington Small Business Retirement Marketplace, a state-run website to match employers with 100 or fewer employees with private-sector plans. The Oregon plan would require employers that do not offer a retirement savings plan to automatically enroll employees at a default contribution rate to a state-sponsored plan.

In 2012, California passed a law to study the feasibility of requiring private-sector companies with five or more employees that do not offer retirement plans to automatically deduct contributions from employees’ paychecks. The state is expected to authorize the plan in 2016.

While each state seems to offer its own unique plan, there are common elements: automatic deductions; contributions placed in individual accounts; and professional investment managers hired to oversee the accounts.

Connecticut’s comptroller, Kevin Lembo, summed up the position of a growing number of states when he spoke at a recent retirement conference: “We wish we didn’t need to be in this space. If these folks don’t have adequate savings, and they run out of money, they’re coming back to us for services and support.”