The looming retirement crisis looks to states to step up

A sizeable chunk of the U.S. working adult population has nothing saved for retirement and only Social Security to look forward to. Which is why several states, as well as the retirement industry, are working to bring retirement plans to employees whose employers can’t afford to offer them. To get some perspective on these initiatives, we turned to Ashvin Prakash, Director of Product Development at Ubiquity Retirement + Savings, who oversees the strategic roadmap for Ubiquity’s retirement solutions for small businesses across the country. With over 15 years of financial services experience, Prakash is responsible for identifying, designing and launching new products. Founded in 1999, the San Francisco-based company offers customizable, flat-fee retirement plans for small businesses.

BenefitsPRO: What was the inspiration behind the state-mandated retirement program and what does it hope to accomplish?

Ashvin Prakash: The goal is universal access to workplace retirement plans — which entails encouraging more businesses to offer retirement savings options to employees in an effort to combat the looming retirement crisis in America. The initiative was spearheaded in 2008-2009 by U.S. Congressman and House Ways & Means Committee Chairman Richard Neal, who believes everyone should be able to set aside tax-deferred funds to save for the future.

It has become especially important now, as we see an aging population that isn’t prepared for retirement due to several factors. Most significant is the broken “three-legged stool” of retirement income, as people have historically relied on Social Security, pensions and personal savings. Now, very few employers offer pensions and Social Security is drying up — with funds expected to be depleted as soon as 2035. More than ever before, the responsibility for saving falls squarely on the individual.

Other aspects contributing to the looming retirement crisis include increasing life expectancies that add more years to live in retirement, and rising health care costs. Finally, the widespread impact of burdensome student loan debt means that many people find it very difficult to start saving for retirement during their early years in the workforce.

How many states have currently adopted state-mandated retirement plans or plan to in the near future?

Since 2012, at least 45 states have implemented or considered establishing state-facilitated retirement savings programs. During the 2020 legislative sessions, at least 20 states and cities introduced legislation or formed study groups to explore options. Today, 13 states and 2 cities have enacted new programs for private sector workers.

Connecticut, Maryland, Vermont and Colorado are expected to launch programs this year. So far, states have selected between an Individual Retirement Account (Auto-IRA), Voluntary Payroll Deduction Roth IRA, Multiple Employer Plan (MEP), a web-based marketplace intended to connect employers and individuals with plans outside of the program, or a hybrid model. The active programs (California, Illinois, Massachusetts, Oregon and Washington) collectively held over $245 million in assets as of April 30, 2021.

On July 1, 2019, California began rolling out CalSavers, the automatic-enrollment, payroll-deduction IRA program for the 7.4 million private-sector workers in the state who do not have access to an employer-sponsored retirement savings plan. 10,243 employers were registered and 138,590 individuals were participating in plans at an average monthly contribution rate of $136.38 as of April 30, 2021.

Employers in California with more than 50 employees will be required to enroll in the state-run IRA or offer a private option on June 30, 2021. As of March 31, 35% of employers required to register by June 30, and 70% of employers with more than 100 employees who were required to register by Sept. 30, 2020, had either registered or responded to the state’s request to do so.

How does CalSavers compare to other state programs?

California, Illinois and Oregon all have active auto-IRA programs. Under CalSavers, contributions sit in a capital preservation fund for the first 30 days. With Illinois Secure Choice and OregonSaves, it’s 90 days. After 30 or 90 days respectively, the investment is moved into a target date fund based on projected retirement age unless the employee opts into another investment strategy. This provision helps to protect against market volatility for individuals who were automatically enrolled by their employer but then choose to withdraw their funds.

CalSavers plan participants are subject to administrative, asset-based fees of 0.825%-0.95% compared to Illinois Secure Choice’s rate of 0.75% and OregonSaves’ 1%.

What happens if an employer does not register for a plan by the deadline?

In California, there is a $250 penalty per employee starting 90 days after the deadline. The fine increases to $500 per employee 180 days after the deadline.

What have been some of the biggest challenges of implementing state-mandated retirement plans?

First and foremost has been getting employers to pay attention, respond and make decisions amid the pandemic, considering that so many small businesses are struggling just to get by. They have many important things to navigate right now and tough decisions to make.

Understandably, making retirement plans available to employees may not be at the top of their priority list, but it should be. The pandemic has also impacted the rollout of these programs at the state level. Several states, such as California, have had to push back their deadlines, and others are delaying the enforcement of the deadlines.

Onboarding has been another significant hurdle. After an employer signs up for the program, a significant amount of hand-holding can be necessary to get them set up on the platform and familiar with the steps needed to enroll employees and properly submit contributions. This process can take a few weeks, and can put additional strain on both the states and providers.

Additionally, all three states with active auto-IRA programs (California, Illinois and Oregon) have priced the programs as an asset-based fee. Given the time it takes for assets to accumulate in these accounts, states and providers may find themselves challenged to absorb many of the upfront costs of these programs (e.g., marketing, onboarding). As a result, OregonSaves recently approved a new hybrid pricing model which will charge $18/year plus a 0.25% asset fee for each account and is expected to go into effect in the fall of 2021.We may see more states follow Oregon’s lead and consider shifting to a flat-fee or hybrid pricing approach in order to recoup some of the upfront program costs more quickly.

What are the benefits of enrolling in the state programs?

There are several benefits, including 1) no cost to the employer, 2) no fiduciary risk, 3) a lower administrative burden, 4) oversight from state representatives, 5) automatic employee enrollment, 6) greater portability offered by IRAs and 7) no investment management responsibilities.

What are the potential drawbacks of enrolling in the state programs?

The access to workplace retirement savings plans offered by state programs is a big step forward in solving the looming retirement crisis. However, state programs offer less customization and benefits than private plans. Additionally, the annual contribution limit for a 401(k) is about three times higher than that of an IRA which is the typical savings vehicle in a state program. Higher contribution rates allow savers to take advantage of the power of compound interest, meaning the more money that is saved, the more it can grow over time and enable savers to achieve long-term financial security.

As previously mentioned, all of the active state programs currently have asset-based fees. A flat-fee pricing approach can provide greater transparency and ultimately lower costs for employees as savings accumulate. Private 401(k) plans also tend to offer a wider variety of investments and greater plan design flexibility, while state-run IRAs have more limited options.

There are also more tax benefits for employers who offer 401(k) plans. The Setting Every Community Up for Retirement Enhancement (SECURE) Act stipulates that small businesses can qualify for up to $16,500 in tax credits over a three-year period by starting a qualified retirement plan with auto-enrollment.

If a business does not want to enroll in the state program, what are its other options?

The options vary by state, depending on qualified alternative plans. Businesses could offer a private 401(k) or 403(b) plan, which would allow for more savings while providing tax incentives and greater customization. While these products do place additional fiduciary responsibility on employers, choosing the right provider can help ease much of the administrative responsibilities.

Another option is a SIMPLE IRA, which would allow participants to save a little more than a state plan and enable employer contributions. Conversely, these plans can be more expensive due to the required company match. Some states, like California, also allow a private payroll deduction IRA plan.

Is there any other retirement legislation in the works that could influence the future of retirement/state-mandated programs?

The potential exists for a federal mandate under the Biden administration that would require businesses to offer retirement savings options to employees. Given the degree of support for this idea, which is also being driven by U.S. Congressman and House Ways & Means Committee Chairman Richard Neal, enactment could happen in the next year or two, leading some states to postpone or even reverse their own mandates.

Another possibility is boosting the Saver’s Credit refund, currently available in 401(k) plans for people under a certain income level. Updated legislation is being proposed that would offer a 50% government match on contributions up to $1,000 per year to a 401(k) or IRA, regardless of whether the individual owes income taxes.

More immediately, Securing a Strong Retirement Act of 2021, a bill nicknamed “SECURE Act 2.0,” could see significant legislative action soon and I anticipate strong bipartisan support for it, similar to what we saw with the passage of the original SECURE Act in late 2019.

What are the key initiatives included in the SECURE Act 2.0 and how could these changes affect the future of retirement savings?

The goal of the SECURE Act 2.0 is to make it easier for Americans to save more for retirement. To increase plan participation, the bill would require employers to automatically enroll eligible workers into 401(k) or 403(b) plans at a savings rate of 3% of their salary, increasing by 1% each year until their contribution reaches 10%. Employees would have the ability to opt out or customize rates. Part-time employees who work at least 500 hours a year would also be eligible to participate in 401(k) plans after two years as opposed to the current three-year waiting period.

Savers between the ages of 62 and 64 would also have the opportunity to contribute an extra $10,000 (an increase from the current $6,500 allowance) to their 401(k) and 403(b) plans. Participants in a SIMPLE IRA could contribute an additional $5,000 (up from the current $3,000).

The SECURE Act raised the age that individuals must start taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s from age 70 1/2 to 72. To account for increasing life expectancy and allow more time for tax-free growth, the SECURE Act 2.0 proposes raising that age incrementally over the next decade, reaching age 75 by 2032. The bill also proposes reducing the tax penalty for failing to make a mandatory RMD withdrawal from 50% to 25%.

Additionally, employers may have the option to match a portion of employees’ student loan payments as a contribution to their retirement plan, even if the employee is not contributing to the plan.

These are just a few of the key provisions outlined in the SECURE Act 2.0. At this time, it is only a proposal and nothing has been signed into law. As the bill moves through the legislative process, things could very well change.

Initiatives on the federal level along with individual states’ efforts will be critical in helping all Americans achieve their right to a secure retirement. While there is still much to be done, I am optimistic that we are moving in the right direction.