States Move to Bolster Private Retirement Savings

WASHINGTON — Millions of Americans are facing deprivation and poverty in their old age unless they manage to significantly increase their savings for retirement. And they know it: for a decade, polls have shown that concerns about retirement security are stronger than about the cost of health care, fear of job loss or other economic worries.

With ideas that address the problem going nowhere at the federal level, state governments are stepping up to the plate, enacting or considering plans to encourage more savings. Their focus is on private sector workers who aren’t presently covered by corporate plans. Governors in Illinois, Oregon, Washington, California and Massachusetts have already signed legislation to address the issue, and legislatures in some two dozen other states are considering action.

Some experts in retirement issues are excited by these state-level developments. “I think they constitute the most important step toward retirement security in decades,” said Joshua Gotbaum, former director of the U.S. Pension Benefit Guaranty Corporation, at a recent conference sponsored by the Brookings Institution’s Retirement Security Project.

But the states’ efforts face many challenges. They must answer questions about whether the savings plans should be “automatic” or more voluntary, and about who should adopt fiduciary and liability responsibilities. They raise questions of  “portability” in a highly mobile workforce where they average person’s career can span seven or more jobs. Some may conflict with federal law; the Labor Department is currently working on regulations to clarify what can and can’t be done.

In mid-September, the Retirement Security Project published a paper by project director William G. Gale and deputy director David C. John, who also serves as policy adviser at AARP,  outlining both the state of retirement savings in the country and the issues confronting state governments’ initiatives. Also in September, the Government Accountability Office published a study titled “Federal Action Could Help States Efforts to Expand Private Sector Coverage.”

Dimensions of the Challenge

About 45 percent of workers in the private sector participate in workplace retirement savings plans, according to GAO. So about half of workers do not participate, principally because small businesses don’t tend to offer such plans:  only 14 percent of  businesses with 100 or fewer employees have retirement savings plans for their workers. Estimates are that some 55 million wage and salary workers between the ages of 18 and 64 don’t have access to an employer-sponsored payroll deduction plan.

Studies have concluded that workers without such plans have little by way of savings: some 94 percent held less than $25,000, according to an Employee Benefits Research Institute study published last year. Individuals can, of course, establish their own Individual Retirement Plans (IRAs), but few do so. Efforts to improve the situation target families earning $30,000 to $80,000--the heart of the middle class.

A principal thrust of state efforts is to encourage, or require, small businesses to facilitate savings by their employees. The businesses would not have to contribute to their employee plans. But they would send amounts the workers themselves designated to retirement savings vehicles managed by third parties, just as they withhold and send funds to the Social Security System each payday.

A similar, nationwide automatic-enrollment IRA program was proposed by the Obama Administration in 2009. It had bipartisan support at the time. But the Affordable Care Act, with its unpopular employer mandates, made it politically impossible to impose more federal withholding requirements on small businesses. The Obama initiative collapsed. But this July, bowing to pressure from retirement savings advocates, the White House ordered the U.S. Department of Labor to review its long-standing opposition to state-level plans. A proposed rule on automatic IRAs is expected by the end of the year.

Students of the problem argue that it’s very much in the states’ own financial interests to attack the private savings problem. No one is suggesting that states should now take on more liabilities, burdened as they are in many cases with sorely underfunded public pension plans. But if their citizens run out of money as they age, states will perforce be left holding the bag. “If Maryland doesn’t act now [to encourage private savings], Maryland taxpayers will face higher costs for decades to come, as retirees are forced to turn to state assistance instead of living on their own savings,” wrote Joshua Gotbaum and David John in a paper last February—published by the since-disbanded Maryland Governor’s Task Force to Ensure Retirement Security for All Marylanders.

Gotbaum and John noted that the average monthly Social Security benefit in Maryland is $1,300—not enough to cover even basic needs.

Types of Plans

Automatic enrollment of workers in retirement savings plans is the holy grail of many experts, since it produces considerably higher participation and savings than voluntary plans. Three major organizations are promoting the idea through a common website: AARP, the Financial Industry Regulatory Authority and the Brookings Retirement Security Project. Both Illinois and Oregon have passed legislation that will require small businesses to provide such automatic enrollment, though workers will be able to opt out.

Illinois state Sen. Daniel Biss, a Democrat, told the Brookings conference about the hurdles he’d surmounted as a key author of the state’s plan. One important decision, he said, was not to have a state “study committee” that would delay action on a much-studied issue. Another was to go for automatic enrollment. Then, a “politically difficult issue,” he said, was to decide what businesses the law would cover. It provides that all businesses with 25 or more workers will be covered when the new system begins in 2017. Biss said he’d hoped that the coverage of the law will be expanded by lowering the employee threshold, inasmuch as the 25-employee cap “cuts out a significant number of the 2.5 million Illinois workers who aren’t covered by plans now.”

Businesses that do not move to establish savings plans would be subject to a penalty of $250 per employee per year, moving to $500 per year if noncompliance continues.

Of course, the new programs must also define the definition of an employee who is eligible for coverage. In the case of Illinois, all workers, no matter how many hours they work, are to be covered. And other issues arise: Is an owner of two restaurant franchises, each employing 13 workers, covered by the law, or not?

Another important issue is where to set contribution levels under automatic enrollment plans. Experts say that 3 percent of salary is a good starting point—one that will accustom workers to saving some of their paychecks. But they also say that it’s not high enough to produce enough savings, and that levels should gradually be increased over time.

The Illinois program is designed to withhold 3 percent. Employees can choose to opt out entirely or, in some cases, to choose a higher level of savings. Most of the funds saved will go into target date funds, focusing more on equities than bonds. So this would likely provide higher returns than the new federal myRA accounts, which offer only government bonds. Participants will have other options too, entailing more, or less, risk.

As Illinois considered how to structure its plan, Biss said, policymakers sought to avoid “the cudgel of ERISA”—the detailed, complex federal Employee Retirement Security Act.

ERISA, Biss said, is “burdensome, confusing and scary to Illinois employers.” So the state’s new savings vehicles will be Individual Retirement Accounts in a structure outside the reach of the federal law. And, he added, this structure will make plain that the system is wholly private: “We have 628 public pension plans—in very, very bad shape. We do not need a 629th.”

The Illinois plan is not without uncertainties. For instance, the law provides that it will not take effect if the new IRA plans are found not to be tax-qualified or if they are determined to be subject to ERISA. Future U.S. Department of Labor rulemaking should answer these questions.

Oregon began working on similar ideas with the passage of a law in mid-2013 setting up a task force to study the issues. After that study was completed, the legislature passed another measure, signed into law this summer, to establish a seven-member Oregon Retirement Savings Board. Contributions to the plan are to begin no later than June 16, 2017. But, as in Illinois, the plan will not take effect if it’s deemed by the board to be subject to ERISA requirements.

Washington state has taken a different approach. Legislation that established the State Small Business Retirement Marketplace, signed into law on May 18, creates a new program to be run from Washington state’s Department of Commerce. It will offer private sector employers and employees access to a variety of plans expected to be offered by financial services companies. Participation would be voluntary—and therefore lower than in states like Illinois that are requiring businesses to offer plans.

Massachusetts has also established a retirement savings plan for employees at small non-profit organizations in the state. Participation is voluntary. Connecticut last year enacted a law setting up a study of a new, state-administered retirement program—applying to employers with five or more workers.

A running account of state government action to encourage retirement savings plans for private sector workers is maintained by the Washington, D.C.-based Pension Rights Center. It provides summaries of action in 25 states, and links to fuller descriptions of these actions. The site also includes links to AARP’s State Retirement Savings Resource Center and other useful information. Georgetown University’s Center for Retirement Initiatives tracks action moving forward on the private savings issue in the nation’s capital and in the states.

Other Issues

Although there’s widespread agreement among experts that increasing Americans’ retirement savings is essential, some say the problem needs to be addressed at the national level, instead of state by state.

That view was represented at the Brookings conference by Lisa Bleier, managing director for public policy and advocacy for the Securities Industry and Financial Markets Association, representing hundreds of securities firms, banks and asset managers.

“We disagree that states are the right place” to address the issue, Bleier said. A key issue, she said, is portability—the ability to carry one’s pension plan from one state to another. “Will people remember that states are holding their money? Can they keep track of that across seven or more jobs?”  

Bleier expressed concern about questions of liability for ensuring that employees’ funds are responsibly handled and paid out when the time comes. “Will the employers or the states carry such liabilities?” she asked, saying in most cases these issues are unresolved.

And she worried about burdens on small employers that may be struggling to meet payroll and grow their businesses—for new record-keeping and transmittal of funds to new entities.

Blier was more supportive of Washington state’s program saying that SIFMA experts collaborated with state officials to specify features of the programs the private financial services would offer.

As the state-based movement gathers steam, many are looking to the U.S. Department of Labor to rule on unresolved issues.

“We want more than the department is likely to give,” said David John. But he predicted that the new regulations will approve automatic IRAs, and will “give some nod” toward loosening restrictions on multiple-employer pension savings plans. At present, rules allow such plans only among companies in the same industry, but some states are looking at encouraging disparate small businesses to band together to create common savings vehicles.

John, Gotbaum and other experts foresee a continuing surge of interest in state-based plans. They “could improve the lives of millions of people,” Gotbaum told the Brookings gathering.

Correction: In the story, as first published, some statements attributed to David C. John were in fact made by Joshua Gottbaum, who was introducing John at a Brookings retirement policy event. Gottbaum, former director of the U.S. Pension Benefit Guaranty Corporation, is a guest scholar at Brookings. John is deputy director of the Brookings-based Retirement Security Project.