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The unlikely superheroes in the fight to fix retirement savings may be states.
The New York Legislature recently approved a program in its 2019 budget that will create a state-run tax-advantaged retirement account for private sector workers who don’t have an employer-sponsored retirement plan available to save for their future. New York is the latest in a slew of states looking into running their own retirement-saving plans to help workers easily deduct money from their paychecks to build a nest egg. More than 40 other states have considered such a program since 2012, though only nine have decided to move forward by either piloting a plan or officially enacting one, according to Georgetown University’s Center for Retirement Initiatives.
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Why the interest? Because Americans don’t save as much as they should for retirement, either because they’re struggling to pay daily expenses and debts, or because their employers don’t offer a retirement plan like a 401(k). In 2016, less than half (43%) of private sector workers 25-64 years old had access to an employer-sponsored retirement plan, according to the Center for Retirement Research at Boston College. In 1999, that number was 64%.
States are taking different approaches to retirement savings, and not all have implemented their programs yet, said Geoffrey Sanzenbacher, associate director of research at the CRR. “It’s a good first step,” said Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College.
The state plans consist of three types:
• Auto-individual retirement accounts: Oregon, Illinois, Maryland, Connecticut and California have mandatory Roth IRA accounts, meaning that employers who don’t offer an employer-sponsored account must give employees access to state-run IRAs. Roth IRAs are invested with employees’ after-tax dollars, but they grow tax-free and the contributions can be withdrawn tax-free as well. After the account holder turns 59 ½, he may withdraw contributions and earnings penalty-free. Before that age, account holders can withdraw from the account in certain cases, such as to pay for college expenses or to contribute to a first-home purchase.
• Marketplace plans: New Jersey and Washington state chose a marketplace approach, which is a platform where any employee, including gig economy workers and self-employed people, can choose from a variety of low-cost retirement account options offered by financial services firms that contract with the state.
• Multiple-employer plan: Some employers don’t offer retirement plans because they’re too expensive for the company, but by pooling together with other small businesses, they are able to provide employees with a savings program. This plan lets multiple unaffiliated employers participate and offer plans to employees. They are 401(k) plans, not individual retirement plans, which means people can save more than IRAs permit, according to Georgetown University’s Center for Retirement Initiatives.
Even when employees have access to a retirement plan, they may not save in it, but the presence of a 401(k) makes it far more likely. The state-run plans help people save seamlessly by taking money out of their paychecks. The chance of saving is even greater when employers automatically enroll their workers into the plans immediately upon hire, Sanzenbacher said. Take Oregon as an example: employees have saved $2 million in the state’s program, called OregonSaves, since last summer when it was piloted. “What really drives it is the auto-enrollment feature,” said Peg Creonte, senior vice president of Ascensus, the financial firm administering OregonSaves. “There are people who can go out and open a Roth IRA but the fact is, they don’t.”
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Not everyone believes state-run retirement plans are a good idea. The government isn’t as knowledgeable about financial products as professional financial advisers and firms, said Allan Katz, president of Comprehensive Wealth Management Group in Staten Island, N.Y. If you don’t have a 401(k) at work, there are alternatives to a state-run program. You can set up your own IRA or invest in a non-retirement account. “They’re just forcing you to use a particular vendor and not allowing you to make your own choices,” he said.
The federal government has tried its hand at a retirement plan as well. The Obama administration created the myRA program for Americans with no access to a retirement savings plan, but the Treasury Department under President Trump announced in July 2017 it was shutting the program down. Investors weren’t saving enough in these plans to justify the program, the department said. The upfront costs to run such programs are significant at first, Hopkins said, but the benefits of people properly saving for retirement could offset those costs in the long run. People who have adequate savings rely less on government-funded services, he said. “People aren’t saving, so we need an outside force to make a change here,” he said.