The U.S. retirement system is a failure, in at least one respect: Half of private-sector workers have no access to a 401(k) or a pension plan on the job, so millions of Americans have scant retirement savings or none at all. To retire, they’ll need to rely on programs such as Social Security and Medicaid.
The federal government has done little to get more Americans saving for retirement. In December the White House launched a pilot program called myRA (My Retirement Account), an individual retirement account (or IRA) set up through an employer’s payroll system and aimed at low-income workers. But participation is voluntary, and Congress has gotten nowhere with bills proposed to encourage workplace retirement plans.
So the states are stepping up. This month, an Illinois law went into effect that would give a state-run IRA to all employees of companies with at least 25 people on staff who don’t have their own retirement plan. Workers would automatically be signed up to contribute 3 percent of their salary to the IRA and could opt out or adjust their contribution. The system is scheduled to be up and running by June 2017.
California is working on a similar plan, and on Tuesday the Oregon State Senate sent the governor a bill requiring automatic IRAs at private employers by July 2017. By early next year, Connecticut officials must finish a study, mandated by the state legislature, of how feasible a state-run retirement plan would be there. There are advocates for similar plans in at least a dozen other state legislatures.
“I wish we didn’t need to be in this space,” Connecticut Comptroller Kevin Lembo said at a Pensions & Investments conference on Tuesday. But, he added, “if these folks don’t have adequate savings, and they run out of money, they’re coming back to us for services and support.”
These state-run IRAs are designed to be a low-cost version of a 401(k) plan. They’re supposed to make it easy for companies to enroll workers and cheap for states to administer, with only a few low-fee investment funds available. Unlike in a typical 401(k) plan, worker contributions would generally not be matched by employers or the government. They aren’t as beneficial as a 401(k) can be, then, but they’re a whole lot better than nothing.
Even if workers don’t have a 401(k) at work, they’re free to open their own IRAs and contribute with their own money. But only about 5 percent of them open IRAs on their own. The states hope that automatically enrolling them will make saving a lot easier and that even lower-income workers can afford to save a bit more each year. When large employers automatically enroll workers in 401(k) plans, participation can rise from 70 percent to almost 90 percent, and few workers object to such enrollment tactics.
If everyone had access to an auto-IRA at work, it would help—modestly. That’s the conclusion of an analysis issued on Tuesday by the Employee Benefit Research Institute. For example, the chances of what EBRI calls a “successful retirement,” one with enough income to cover average expenses and uninsured health care, would increase 8.4 percent for small business employees in their late 30s. (EBRI’s analysis is based on its Retirement Security Projection Model, which it has been refining since 2003.) That assumes auto-IRAs are required and all employees contribute 3 percent of income. That benefit almost doubles, to more than 15 percent, if the automatic contribution is increased to 6 percent a year.
It won’t be easy for states to get into the private-sector retirement business. Small businesses won’t take the extra regulation lying down. Although Illinois doesn’t make companies pitch in to the auto-IRAs, they still must do the paperwork to sign up their workers. Financial firms have been suspicious of competition from state-mandated auto-IRAs, though they may be tempted by a potential business opportunity: Under most plans and proposals, states rely on private money managers to invest any money saved.
The federal government itself may prove another stumbling block. The states need to comply with strict and complicated federal regulations on retirement plans. In a May 18 letter, 26 U.S. senators (all Democrats except the Vermont independent Bernie Sanders) urged President Obama to help states start auto-IRA programs. “Clarifications are needed as soon as possible” on how the Department of the Treasury and Department of Labor would regulate the plans, they wrote.