American workers rely on their employers’ plans for most of their retirement savings. There are plenty of challenges for retirement savings , but it’s far worse for the estimated 55 million U.S. workers — mostly in smaller businesses — who lack access to an employer-sponsored retirement plan. According to an EBRI survey, about two-thirds of workers without a retirement plan have less than $1,000 in savings and investments.
To encourage higher retirement savings rates for this vulnerable population, many states have stepped in with IRA-type programs to encourage employers without retirement plans to offer one for their workers. Some state plans, like those in Illinois and California, require employers with a certain number of employees to make available a state-run plan — usually with a 3% minimum salary deduction, unless the employee opts out. Other states, like Washington and New Jersey, simply try to make it easier for small employers without retirement plans to offer one, by setting up retirement plan marketplaces of approved investment providers and, in some cases, tax incentives.
As of June 30, 2017, 10 states had enacted some form of state-sponsored plan, and 27 additional states were considering them. This map shows how each state is addressing this issue.
The federal government has broad authority over retirement plans under the Employer Retirement Income Security Act of 1974 (ERISA). States became involved when the federal government did not take action to address the coverage gap among smaller businesses. To encourage states that were designing programs of their own, the Obama administration exempted them from federal rules when they automatically enrolled individuals into an IRA. On May 3, the GOP-controlled Congress reversed those exemptions. As Senate Majority Leader Mitch McConnell stated, “[the states] didn’t like that the basic [ERISA] retirement protections that apply to those who manage private sector retirement plans would apply to the government too,” adding that federal protections shouldn’t be used to compel private-sector workers into government-run plans.
The pullback of ERISA protections potentially forces the state programs — especially the mandatory ones — to make sure they comply with the same requirements that private retirement plans face.
Oregon’s OregonSaves program, which launched July 1, is an example. Its three-year reporting requirement may have run afoul of ERISA rules. But instead of pulling back, the Oregon Treasury Department re-affirmed its commitment to the program: “Even with the passage of the resolution, we are continuing to work toward a successful launch of OregonSaves, on time, and in harmony with the legislation that established the program.”
It’s difficult to envision other states, having moved into the retirement plan space, taking a meaningful step back. “The fact that millions of working Americans don’t have access to a retirement plan at work means that this issue isn’t going away anytime soon,” says Capital Group’s ERISA attorney, Jason Bortz.
The need for more retirement savings vehicles has put states in the driver’s seat for the first time. But the sudden rise of state-sponsored plans — something that didn’t exist even five years ago — generates uncertainty and questions:
There are other retirement-plan options for small-business owners besides the programs offered by their state. Many traditional retirement plans were designed specifically to create a comfortable retirement for employees at a low cost with a minimum amount of employer involvement.
When choosing a plan, the help of a financial advisor can be crucial. State plans may offer a cheaper alternative, or they may impose an undue administrative burden. An advisor can help small business owners sort that out, so they can make the best choice for themselves and their employees.
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