States Experiment with Policy Levers to Help Close Retirement Gap

States Experiment with Policy Levers to Help Close Retirement Gap

Over the past few years, a growing number of US states and cities have enacted legislation to create state-sponsored retirement savings programs for employees of organizations that don’t offer an employer-sponsored plan like a 401(k). Currently, 40 states have considered, studied, or moved toward implementing this type of program, though only 10 states and one major city (Seattle) have yet implemented them, writes Paula Aven Gladych at Employee Benefit News. Not all state and local policies are alike, however: While automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) are the most popular policy tool, others include multiple-employer plans and retirement savings marketplaces:

California, Connecticut, Illinois, Maryland, Oregon and the city of Seattle have adopted automatic IRAs. Massachusetts and Vermont have adopted multiple employer plans and New Jersey and Washington State have adopted marketplaces. New York, the latest state to jump into the fray, has adopted a voluntary payroll deduction IRA. …

The states that haven’t made a move yet will be watching closely to see how effective the different tools are in marketing the plans to employers and employees. … These programs are getting bipartisan support. Blue and red states are studying the issue. Every year there’s a handful of states in study mode, considering what their options are, says [Angela Antonelli, executive director for the Center for Retirement Initiatives at Georgetown University].

New York’s new program, adopted in April as part of the state’s budget for fiscal year 2019, is similar to the auto-IRAs adopted in other states, except that it is not compulsory for any employer to participate, as Paychex analyst Jessica Curtin explained at the time. The program, scheduled to begin in April 2020, uses a Roth IRA structure, so contributions are made on a post-tax basis. Employers cannot make direct contributions to the plan, but those that choose to participate must automatically enroll their employees at a contribution rate of 3 percent of their paychecks; employees may then choose to opt out.

These new state and local programs are popping up at a time when the federal government is moving in the opposite direction: Last summer, the US Treasury canceled the “myRA” program launched under the Obama administration in 2015, which was designed as a “starter” savings program for low-income employees without access to 401(k) plans and made low-risk, low-return investments in the government securities investment fund. Around 30,000 Americans opened myRAs, but only 20,000 ever contributed to them, leading the Trump administration to scuttle the program citing low demand. Congress also voted last year to reverse a Labor Department rule encouraging the development of auto-IRAs and other state-backed retirement schemes.

A growing body of research has demonstrated the power of automatic enrollment to nudge employees toward saving for retirement when they might not make the effort to do so on their own. By making payroll deductions the default option and requiring an affirmative choice to opt out, participation rates rise as those employees who do nothing are already saving. A survey last year found that auto-enrollment was increasing in popularity among US employers, with 49 percent of all plans including the auto-enrollment feature.

These developments are taking place in the context of millions of Baby Boomers reaching retirement age, but in many cases being unwilling or unable to retire. With Americans living longer lives, some would prefer to keep working into their late 60s and 70s, but others, especially low-income workers and women, simply can’t afford to retire. Although US employers have been increasing their contributions to employee retirement plans in recent years, the generational shift from defined-benefit pensions to defined-contribution plans like the 401(k) means that Americans’ overall retirement benefits have fallen considerably over the past two decades.