As it currently stands, large numbers of individuals in the U.S. appear headed toward retirement without the resources they'll need to get through it. A June 2013 study by the National Institute on Retirement Security pegged the retirement savings gap at between $6.8 trillion and $14 trillion. One reason? More than one-third of private sector employees lack access to retirement savings vehicles through their workplace.
A small but growing number of states are taking steps to deal with this looming challenge. In May, the Connecticut General Assembly passed legislation that could be the first step in a state-administered retirement plan for private sector employees. The provision in the state's budget bill establishes the Connecticut Retirement Security Board, which will study the feasibility of creating a retirement savings plan and developing an implementation plan.
Connecticut is further ahead than many states, but it isn't alone. In 2013 and 2014, six states considered legislation that would establish state-sponsored retirement plans for private sector employees, says Luke Martel, senior policy specialist for the fiscal affairs program with the National Conference of State Legislatures. "We're definitely seeing increased legislative interest in the area of retirement security," Martel adds.
States that have taken initiative
Among the actions taken so far:
- In 2012, California Senate Bill 1234 created the California Secure Choice Retirement Savings Trust Act, which would be available to private sector employees. This currently is in the study phase.
- Also in 2012, Massachusetts passed House Bill 3754, which allowed the state treasurer and receiver general to establish a defined contribution plan, such as a 401(k) or 403(b), which could be adopted by nonprofit employers for their employees.
- In May of this year, Maryland Gov. Martin O'Malley announced the creation of a task force to study retirement security for private sector workers.
"States are beginning to recognize that there's a crisis," says Hank Kim, executive director and counsel with the National Conference on Public Employee Retirement Systems. They can try to address the challenge now, or wait until millions of baby boomers hit retirement without the resources they need and turn to social service agencies for help, he adds.
State retirement plans not a new idea
The idea of a state-administered retirement savings vehicle has been around since at least the late 1990s, says Dean Baker, co-director of the Center for Economic and Policy Research, which conducts research on social problems and policies. However, it's just in the past few years that the scope of the problem -- that is, the vast numbers of people facing retirement without sufficient savings or income -- has become clear.
To be sure, those who are employed will accumulate Social Security benefits. However, that's unlikely to be enough, says Justin King, a policy director at the New America Foundation, which promotes policies to encourage increased savings and asset ownership, particularly among lower-income workers. "Social Security benefits are great and important, but for average folks they're not sufficient to maintain the lifestyle they're accustomed to."
How the plans might work
Although the structure of each plan likely will vary, they generally are expected to work like this: Individuals newly hired to a company that doesn't offer a retirement savings plan would have some portion of their paychecks automatically placed into the state option. Employees could opt out, but the default option would be automatic enrollment.
"When you have purely voluntary programs, you don't get good coverage" across all workers, says Nari Rhee, manager of research with the National Institute on Retirement Security. Moreover, those who do enroll tend to be higher-wage employees. "Auto-enrollment tends to help low-wage workers the most."
Contributions of participating employees would be pooled in a state-administered retirement program, boosting economies of scale, which could help keep both administrative and investment management fees low. The dollars would be invested, most likely in low-cost, reasonably safe investments selected by professional investment managers.
Inexpensive to companies
Employers -- or, in most organizations, their payroll service providers -- would deduct the contributions and handle record keeping in much the same way that they might administer, for instance, United Way contributions. As the plans are envisioned, employers wouldn't assume fiduciary responsibility for the investment choices or plan administration.
Nor would these plans be extensions of state retirement plans for the public sector, King says. "This is the states facilitating access to individual retirement accounts. The dollars remain the workers.'"
When an individual contributor retires, he or she could withdraw both the funds contributed and the earnings. The question of whether withdrawals would be in the form of a lump sum or an annuity has yet to be resolved, but a number of retirement experts prefer an annuity structure. "This is not about wealth accumulation, but retirement security income. If that's what it is, the best way to foster that is to annuitize the benefit," says Kim.
While the plans under consideration by these states could be viable retirement savings vehicles for workers who lack access to plans through their employers, some concerns have been raised. Among them: The plans could conflict with federal laws governing retirement plans, according to the Securities Industry and Financial Markets Association, or SIFMA, on its website.
King says the retirement savings experts with whom he's talked generally agree that the proposed state plans wouldn't conflict with federal regulations. However, case law has yet to be established. That means "the state that goes ahead and puts a plan into place is probably setting itself up for some litigation," he adds.
And the plans will compete, to some degree, with financial services firms. However, even some financial industry insiders acknowledge that potential participants in these plans haven't been clients of most financial services firms anyway, Baker says.
Moreover, at least some of the investment managers and plan administrators likely would come from the financial sector, Rhee adds. That would, of course, benefit firms in the industry.
Should more plans move forward, they could benefit both workers without access to other retirement savings vehicles, as well as their employers. These organizations now would be able to offer their employees a way to secure their retirement, but without the resources required to start their own plans.
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