By: Logan Dodson
A study from the National Institute on Retirement Security ("NIRS") estimates that approximately 45 percent of working age households in the United States do not own any retirement assets. Furthermore, the NIRS states that two-thirds of private sector workers without access to retirement plans are employed by small businesses. These low savings rates foretell an impending retirement crisis that could cripple American retirees.
Now, in an effort to promote saving for retirement, state legislators across the country are working to implement bills that would afford private sector workers without employer-provided retirement plans, especially those workers employed by small businesses, coverage under state-run plans.
Currently, the only government program available to those without retirement coverage is President Obama's myRA plan. MyRA enables eligible workers - individuals who earn up to $129,000 or couples who earn up to $191,000 - to allocate a percentage of their paychecks into a fund sponsored by the United States Treasury. MyRA, however, is aimed at jumpstarting retirees' savings and was never intended to replace traditional defined benefit or defined contribution plans. Pointedly, myRA accounts cap at $15,000, an amount vastly insufficient to support an individual through retirement.
While individuals can always independently enroll in a private retirement plan, studies show that many workers are either intimidated by the process of selecting a retirement plan or less likely to save without automatic payroll deductions. States are trying to ward off the prospective retirement crisis by acting now to fill in the retirement hole in the private sector.
More than 20 states are in the process of either considering or implementing state-run retirement plans for private-sector workers. Some states, such as California and Illinois, aim to organize state-run IRA funds. While the specifics vary slightly between the two states, they generally will operate as follows: each will have an automatic minimum-deduction per pay period, such as a three percent deduction; each will have an opt-out mechanism for those employees that wish to not participate in the program; and each intends to provide access only to those workers employed within its small business definition, such as employing less than 25 people. Massachusetts, on the other hand, while also aiming to offer a state-run IRA program, differs from California and Illinois, because it limits coverage to those workers in the non-profit sector.
Despite the states' goals to provide retirement coverage to a greater portion of the workforce, some believe employers will be burdened by prohibitive administrative costs. To address these concerns, both California and Illinois strive to limit administrative costs incurred by small business owners in their state-run IRA programs. California, for example, would limit administrative costs to those associated with providing the automatic payroll deductions and the opt-out mechanism.
Other states tackle the issue differently. For example, last year, the Governor of the State of Washington signed a bill creating a retirement fund portal, the Small Business Retirement Marketplace ("Marketplace"), for those working in small businesses. Rather than organizing a state-run retirement plan, which could present a serious strain on the state's budget, Washington opted to provide an information exchange to educate the State's population without access to employer-provided retirement plans about their investment options. Washington's Marketplace provides a platform where employees and employers alike can find and connect to appropriate private retirement plans. Not all retirement plans may be found in the Marketplace. Washington restricts available plans to those that meet certain standards set by the State. Washington is giving employers the option to match up to three percent of employee contributions.
One factor complicating states' efforts to provide retirement coverage to private sector workers is the federal Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA establishes minimum standards for pension plans in the private industry. Since the proposed state-run plans will apply to private employers, these employers may now have to comply with ERISA's requirements, which can be prohibitively expensive for small businesses.
In January 2016, the Department of Labor ("DOL") closed the comment period on a potential rule that would provide states with a safe harbor from ERISA, thereby eliminating this cost-deterrent. However, if the rule is not implemented, many, if not all, state-run plans could be in jeopardy. Indeed, employers who do not currently offer retirement plans to employees often characterize the intricate requirements of ERISA as cost-prohibitive, and cite those requirements as the reason for failing to provide retirement plans. Accordingly, California and Illinois both condition implementation of their retirement plans on the ERISA requirements being waived by the DOL.
Aside from the concerns regarding the applicability of ERISA, critics of state-run plans decry the states' efforts as unnecessary and potentially deleterious to workers currently enjoying retirement plans through their employers. First, many critics assert that employees have always had the ability to sign-up for private defined contribution plans; thus, the issue is not access to quality plans, but rather providing education to the workforce. Second, many fear that employers currently offering superior plans will migrate to the cheaper state-run plans, because those plans have fewer requirements (e.g., not requiring that employers "match" contributions).
But what seems clear is that criticisms alone will not stop states' momentum to create state-run plans. Workers who do not save now are at real risk in the future. Whatever the solution, that is a problem that neither states nor workers can afford to ignore.