Study after study has noted how little most Americans have saved for retirement. But encouraging participation in 401(k)s and other employer-sponsored plans is only half the battle.
An estimated 78 million Americans, or half of Americans workers, don’t have access to an employer-sponsored retirement plan. One main reason: Most small businesses don’t offer them. Only 14 percent of employers with fewer than 100 employees provide 401(k)s or other retirement savings plans, according to the U.S. Government Accountability Office.
Late last year, the Obama administration launched the myRA (my Retirement Account) program in an effort to provide more savings options. But the plan, which allows workers to contribute post-tax money into a portable, government-backed account, has yet to gain much traction among workers or employers.
In the meantime, states are starting to step in with their own proposals to close the retirement savings gap.
In January, Illinois Gov. Pat Quinn signed a law that would require all businesses in operation for at least two years and that have at least 25 employees to offer its workers an individual retirement savings option by 2017. And last month, Washington Gov. Jay Inslee signed a law that created the Washington Small Business Retirement Marketplace, a state-run website to match employers with 100 or fewer employees with private-sector plans, including myRAs.
“We have seen the level of legislation around retirement security increasing among state legislatures year after year,” said Luke Martel, a program manager at the National Conference of State Legislatures.
At least 15 other states have also considered legislation that would create some kind of state-sponsored retirement plan for private sector employees, according to the NCSL, with varied results. (Tweet This)
In 2012, California passed a law to do a market analysis, which is expected to be completed this year, to see if it can implement a program similar to that in Illinois. And Massachusetts will soon allow nonprofit organizations with fewer than 20 employees to participate in a voluntary retirement savings plan overseen by the state treasurer’s office.
But not all efforts have been as successful. Bills in Indiana, Kentucky, Maine, New Hampshire, North Dakota and West Virginia failed to pass their statehouses. A Colorado bill has been postponed indefinitely and a Maryland one did not get out of committee before the legislative session ended.
Most of the proposed state-backed retirement plans only address employee contributions and don’t offer employer matches, Martel said, as those would be covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that regulates most employer-sponsored retirement plans. In order to qualify for the significant tax benefits available to employers for offering retirement plans, private employers must maintain comprehensive records and funding for the employer match as specified by ERISA, which states worry could be a barrier to participation.
Washington’s program is an exception. Employers who voluntarily participate in the marketplace can also choose to match up to 3 percent of employee contributions. State officials have said the plans on the marketplace will be specifically selected to have minimal paperwork for employers and the match is optional.
But even with a match, IRA contribution limits make the state-sponsored plans less attractive than employer-sponsored retirement plans like 401(k)s. The contribution limit in 2015 for IRAs is $5,500, or $6,500 if you’re 50 years or older. The contribution limit for 401(k)s and similar plans is $18,000, or $24,000 if you’re 50 or older.
Another thorny issue for small business employees is that each state has different rules, said Chad Parks, founder and CEO of Ubiquity Retirement + Savings, which provides retirement plans to small businesses. For example, the Illinois program covers businesses with 25 employees or more while in Washington state, the digital marketplace serves small businesses with 100 or more employees. “Where do they draw the line? At a hundred employees or 25 employees?” Parks asked.”You’re going to [potentially] have 50 different programs for small businesses.”
The bigger challenge, though, may be whether the creation of state-run retirement plans—even in states that require businesses of a certain size to adopt them—will lead to higher employee participation and savings rates. In 2013, the GAO studied how automatically enrolling people without retirement plans into IRAs would affect their retirement savings. It found that even automatic IRAs would only “modestly increase” retirement income.
Specifically, the agency projected that under automatic IRAs, in which3 percent of an employee’s salary would typically be automatically contributed to an IRA through payroll deduction unless he or she opts out, about 36 percent of households could see a median increase ofabout $1,046 in their annual retirement income. (Those households include workers who have not had access to a defined benefit or defined contribution plan as well as workers who had access to a plan at some jobs but not at others.)
Of course, that all depends on employers adopting the plans and employees’ contributing to them. (To date, neither law that’s passed specifies automatic employee enrollment.)
The federal myRA program has shown little public progress on either front. The Treasury Department has yet to announce any private-sector employers that are participating in the pilot program, which launched in December. And employer sign-on is key to the programs short-term success, since it currently depends on companies setting up direct-deposit systems for participation.
The slow start illustrates the challenges states may face as well as they roll out similar programs. “It’s not about lack of access, anyone can open an IRA,” said Parks. “It’s a lack of motivation and understanding.”
More states may pass laws to improve savings options for employees. But whether workers participate in them enough to boost their retirement prospects remains to be seen.