Top research group says federally mandated Auto-IRA is answer to retirement savings gap among non-covered workers.
According to a study by the Center for Retirement Research at Boston College, only “half of private sector workers are covered by any sort of employer-sponsored retirement plan.” The study entitled, STATE INITIATIVES TO COVER UNCOVERED PRIVATE SECTOR WORKERS also states that approximately one-third of all workers end up with no coverage at all and are solely reliant on Social Security benefits for retirement income.
The report goes on to show how Federal efforts to create simple plans for small businesses, most notably the Obama Administration’s proposed Automatic IRAs, have been unsuccessful in closing the coverage gap. The idea was to auto-enroll employees in “Auto-IRA’s” with contributions from payroll deductions. Employees would be auto enrolled and free to opt-out. However, that plan has failed to materialize.
Into the Federal breach steps the States. This is where it starts to get interesting. States are exploring the challenges of how to shield employers and fiduciaries from ERISA. In California, for example, the legislation moved the vehicle from a cash balance plan to an IRA. Further, California has explored possible participant risk-pooling and guarantees.
In an effort to lift the ERISA cloud, the DOL has issued a proposed rule for “Savings Arrangements Established by States for Non-Governmental Employees.”19 The rule seeks to establish a safe harbor whereby state-run payroll deduction programs with automatic enrollment would not be covered by ERISA.
In states such as Washington and New Jersey, a plan for a marketplace approach is being considered.
Connecticut, Illinois and Oregon have adopted the legislation that more closely resembles the Federal Auto-IRA model.
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).16 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 establishment of these programs could be a critical boost for smaller employers in helping to meet the retirement needs of their employees. The report concludes that a mandated program regime is favored over offering simplified plans to sponsors. “Clearly, more retirement saving is needed. Designing simpler plans in the hope that they will appeal to small business has not worked in the past and is unlikely to work in the future.”
However, the final statement of the report concludes that while state-sponsored plans may be helpful a national plan would be most efficient.
Even if more states are successful in setting up a tier of retirement income for their citizens, this approach to implementing a retirement program is clearly a second-best alternative. A national Auto-IRA 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. This country needs federal legislation!
