States take the lead in urging employees to save for retirement
Congress has stalled out in offering ways for people to save more for retirement, particularly those who don’t have access to a retirement plan at work. That’s where the states come in.
Since 2012, 40 states have acted to implement, study or consider legislation to establish state-facilitated retirement savings programs, according to the Center for Retirement Initiatives at Georgetown University. As of April, 10 states and one major city had adopted legislation to pave the way for state-run retirement plans.
Oregon was the first to go to market with its OregonSaves program, which began a pilot program in July 2017 with 11 employers. By the end of 2017, there were 60 employers and the state opened its doors for full enrollment.
“The retirement crisis in Oregon is not unique,” says Joel Metlen, policy director for OregonSaves. “On a national level there are big changes in terms of how retirement is structured in America.”
For one, defined benefit plans are going away so more people are relying on defined contribution plans, like 401(k)s and 403(b)s, for their retirement savings. Those options don’t cover millions of individuals who don’t have access to a workplace plan, either because they don’t work full-time or because their company doesn’t offer a plan.
“There is an option for IRAs for folks but, the fact is, people don’t go out and start one. With all that going on, you end up with millions of people who aren’t saving enough for retirement. Social Security isn’t going to be enough and ultimately it is not good for any of us if people are not saving,” he adds.
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People who don’t save won’t have the retirement they are hoping for and employers are stuck dealing with employees who are stressed out about their finances.
“In the end it is going to be a big deal for states if they have to provide more social services to folks. If they are not self-reliant as they age, it means more cost and services for already tight budgets. That’s the overall situation and driving force behind this program,” he says.
Oregon identified one million residents who didn’t have access to retirement savings at work — 600,000 whose employers don’t offer a plan; 200,000 whose employers offer a plan but they aren’t eligible to participate; and 200,000 self-employed people who can opt in — and has set out to reach as many of them as it can through OregonSaves.
According to the AARP, people are 15 times more likely to save for retirement if they have a workplace option.
There are four basic models out there for state-run plans — automatic IRA, multiple employer plan, marketplace and voluntary payroll deduction IRA — and every state has chosen something different. By far, the most popular, has been the automatic IRA, says Angela Antonelli, executive director for the Center for Retirement Initiatives at Georgetown University.
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.
“We are seeing how these different models will work in terms of ultimate access and participation and coverage,” Antonelli says. “A lot will be looking at the data, how plans perform.”
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.
“States are pushing innovation by shining a light on the problem,” says Antonelli, by encouraging the public and private sectors to work together to help more workers save for retirement. “As a result, everybody is going to be better off,” she adds.
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 Antonelli.
The Oregon plan
Even though California and Illinois were the first to adopt plans, Oregon was the first to bring its project to market.
Tobias Read, treasurer for the State of Oregon, says it is nice that the Northwest states are leading the way on this important issue. Washington State brought its marketplace online in March 2018.
As of mid-April, there were 10,000 employees contributing to OregonSaves accounts through their workplace, saving $2.5 million since the program first launched. More than 600 employers are facilitating or preparing to facilitate the program.
The state’s legislature created a taskforce in 2013 to look at the different options it could implement to help workers save more for retirement. It came back with recommendations in 2015.
The program was designed in 2016 and piloted in 2017. It went statewide in January 2018. The state has been implementing the program in waves, starting with the largest employers and working its way down to the smallest.
“The lesson from this process of passage through the legislature and early implementation is to be as collaborative as you can. Recognize there will be changes you will have to make over time. Cultivate a network of people who can help refine and improve design and implementation,” Read says.
People who opt in to the plan are automatically enrolled in a Roth IRA at 5%, escalating 1% a year to reach 10% savings. The standard investment path is that the first $1,000 saved will go into capital preservation savings and everything after that will go into an age-based target-date fund.
Hiram Towle, general manager at Mt. Ashland Ski Area in Ashland, Oregon, says that his ski area was one of the first companies to adopt OregonSaves. Because his business is so seasonal, it has made it very difficult to bring in employees every year.
“We have to incentivize people to work for Mt. Ashland. We have been through troubled times. We rely on mother nature which sends us ups and downs, if you will,” Towle says.
After the 2014 season, when the nonprofit ski area didn’t open at all because of a lack of snow, it was forced to strip away all the benefits it once offered to employees.
“We heard about OregonSaves and were really excited to bring that back to facilitate for our employees,” he says.
So far, Mt. Ashland has 12 employees enrolled in the plan, one who is contributing 100% to the program since it is his second job. The employees participating have said it is easy to use and they are happy the money comes directly out of their paychecks. They also like that when they leave Mt. Ashland, they can take their accounts with them.
A portal for employees in Washington State
Washington State opened up its retirement marketplace in March 2018 with two plan providers to choose from. It has since added one more.
In Washington, about 2 million working people are not saving for retirement through their workplace, says Carolyn McKinnon, director of the Washington State Retirement Marketplace.
Washington passed legislation in 2015 to create the marketplace, which is a voluntary portal serving employers and individuals, where people can comparison shop for state-verified, low-cost savings plans.
The legislature wanted the final product to remove barriers for small businesses to offer plans.
The online portal allows potential employers and individuals to answer questions about their own situation. They are then referred to one of the marketplace’s providers where they can enroll in a plan.
“Our goal is to make the marketplace easy to use, informative and motivational while moving visitors through the process, getting to one provider and getting saving as soon as possible,” says McKinnon.
The financial services firms who want to offer plans through the marketplace must be verified by the state Department of Financial Institutions. They have to be licensed or have a certificate of authority in Washington, be in good standing, meet all federal laws and regulations and meet the statutory requirements for the Retirement Marketplace, including fee limits.
Washington manages the platform and content management system for the marketplace and does the verification of financial service providers involved with the marketplace.
Seattle passed its own retirement initiative, which it is working hard to launch in 2019. It is an automatic IRA.
“We believe the Washington marketplace and Seattle plan are mutually beneficial for Washingtonians,” says McKinnon. “We have a shared mission and we are looking to collaborate on this project.”