Since 2012, over half the states in the U.S. have passed legislation to set up or study state-sponsored retirement savings programs for the more than 30 million full-time private sector workers without access to a savings option across the country.
In an effort to help guide effective policy, researchers at Pew Charitable Trusts set out to analyze the approaches states are taking so far, and the obstacles they can expect to face in crafting workable programs.
The analysis identified three approaches states are taking.
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Under one option, states are establishing plans that will operate under the Employee Retirement Income Security Act. In the second, as in the case of Illinois' Secure Choice program, a state can sponsor a plan outside the jurisdiction of ERISA. That allows workers to make payroll contributions to a state-administered IRA account. And in the third option, states are opting not to make enrollment or business participation mandatory, but are electing to facilitate more businesses to sponsor plans though the establishment of state-run marketplaces.
Primary among the many considerations legislators must factor is whether or not to make participation in state-run plans mandatory. In looking at adoption rates by plans sponsors in the voluntary private market, the report suggests voluntary participation in state-run programs may not generate increases in coverage.
In the private sector, where employers are not required to offer a defined contribution plan, only 58 percent of the country's full-time workforce has access to a savings plan. That number drops to 22 percent for businesses with fewer than 10 employees.
If states require employer participation, policy makers then have to consider at what level requirement kicks in. In legislation passed in Illinois, employers with at least 25 employees that don't offer a plan will be required to participate in the program. California's proposed legislation would require employers with as few as five employees to participate.
In setting a higher threshold for mandatory participation, Illinois' program may be limiting its potential effect. Had it set mandatory participation for employers with a minimum of five workers, another 700,000 workers would have access to a savings plan.
While state sponsors will pay the cost of administering plans, employers will still have responsibilities under mandatory programs. For one, they will have to enroll employees, which will require an investment in time on the employers' part. That raises the question of how often employers should enroll employees. Some proposals require annual enrollment. The specifics of how states craft enrollment periods could adversely impact a plan's effectiveness, the report suggests.
"Policymakers should consider the cost and administrative impact of an open enrollment period on employers, especially small businesses, and whether other approaches would be more cost-effective or less burdensome to administer. For example, they might limit the duration or frequency of enrollment periods after initial implementation or use web-based or mobile tools to allow participants to make changes without involving their employer," the report says.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
