At any given moment in time, only about half of private-sector workers are covered by any sort of employer-sponsored retirement savings plan. This would not be a problem if workers saved outside of these plans, but most do not. Not surprisingly, the lack of coverage is particularly prevalent among those at the lower end of the income distribution, so many low earners end up dependent solely on Social Security for their retirement income. Even those with a 401(k) plan often end up heavily reliant on Social Security because they lack continuous coverage, cycling in and out of employers who offer a plan. These facts have made policymakers eager to expand retirement plan coverage to more workers.
Since most of those without coverage work for small employers, policymakers for decades have tried to solve the coverage problem by introducing simplified retirement plans. But despite these efforts, coverage rates have remained around 50 percent in the private sector because plan administration costs are only one of several reasons that small businesses do not offer plans. Equally important considerations include too few employees, lack of employee interest, and unstable business income. Recognizing the difficulty in getting small businesses to adopt plans, the Obama Administration proposed “Automatic IRAs” in 2009 to cover the uncovered, and others have come up with alternative proposals. But no progress has been made at passing federal legislation. Into this breach have stepped the states.
The first state to move forward was California. In 2012, the state enacted the California Secure Choice Retirement Savings Program system. Most importantly, the vehicle chosen by California was an IRA, which was designed to avoid requiring employer contributions and subjecting employers or other fiduciaries to the Employee Retirement Income Security Act (ERISA). The goal of this choice was to keep employer burdens minimal. California also decided to move from voluntary participation to a mandate on employers without a plan to automatically enroll their employees in Secure Choice. Automatic enrollment in the plan will boost participation significantly while still giving employees the chance to opt out if they desire. At this point, California has completed a market and feasibility study, but needs final legislation to get its auto-IRA program under way.
Four other states – Connecticut, Illinois, Oregon, and Maryland – have also passed legislation following the Auto-IRA model. Connecticut has completed its feasibility study but has yet to get the program up and running. Illinois has not yet completed a feasibility study. Oregon started a little later than these other states but has completed its feasibility study and is planning on having its program up and running by 2017. Oregon’s plan, like the other states, is to keep the money separate from any public pension funds, with assets being managed by a private-sector provider but overseen by the state. Maryland is the most recent state to take this approach and is still relatively early in its process. But it is taking a unique approach to ensuring employer participation by offering a waiver of its $300 annual filing fee for businesses either offering another retirement plan or participating in the state’s program.
Two states – Washington and New Jersey – have followed a different path. These states have adopted a marketplace approach, which does not involve an employer mandate to automatically enroll uncovered workers, but rather is designed to educate small employers on plan availability and promote participation in low-cost, low-burden retirement savings plans. Participation is voluntary. Depending on the specific plan chosen, employers participating in the marketplace could be covered under ERISA, although it is likely some non-ERISA plans would be offered.
Other states, such as Massachusetts, are toying with the idea of having both an auto-IRA system and a state-run system of multiple employer plans (MEPs). MEPs would allow unrelated employers to offer 401(k) plans but offload a portion of the administrative burdens and fiduciary responsibilities to a third party. While employers could not be required to adopt a MEP, the existence of an employer mandate might encourage small employers to opt for a MEP rather than an IRA.
The map below shows where plan activity has taken place. Red and orange identify those states with plans under way; the stripes indicate states with active legislation; light grey indicates those states with failed legislation. It should be noted that many of the states with active programs today had many failed pieces of legislation before an actual program was enacted. The message from the map is that state activity to cover uncovered workers is widespread.
State Retirement Security Activity, as of June 2016
Source: Updated from Munnell, Belbase, and Sanzenbacher (2016).
And although the federal government has not taken action to implement auto-IRA itself, in July 2015, President Obama instructed the Department of Labor (DOL) to provide clarifying guidance so that states could develop these plans without running afoul of ERISA. In August 2016, the DOL finalized the guidance, which exempted state auto-IRA programs from ERISA. Additionally, in November 2015, the DOL issued guidance that sought to clarify the treatment of marketplaces and the use of a state-run MEP that other states are considering. This guidance should provide new momentum for the adoption and implementation of state savings initiatives.
Of course, this approach to implementing a retirement program is clearly a second-best alternative. A national plan would be a much more efficient way to close the coverage gap, offering substantial economies of scale and avoiding the laborious, time-consuming, and expensive process of setting up 50 different state plans. But although this country clearly needs federal legislation, the state plans are a promising step towards giving more workers access to employer-based retirement plans.
Munnell, Alicia H., Anek Belbase, and Geoffrey T. Sanzenbacher. 2016. “State Initiatives to Cover Uncovered Private-Sector Workers.” Issue in Brief 16-4. Chestnut Hill, MA: Center for Retirement Research at Boston College.
This article was adapted from Munnell, Belbase, and Sanzenbacher (2016). Geoffrey T. Sanzenbacher is a research economist at the Center for Retirement Research at Boston College. Geoffrey can be reached at firstname.lastname@example.org and 617-552-6783.