States want to help retirement savers. Let them.
“Policymakers wanting to avoid a potential retirement crisis view the state-sponsored auto-IRA model as a simple, low-cost way to provide workplace retirement plans that gently nudge workers with no other option to plan for a more financially secure future.”
—Investment industry’s fight against state-run retirement plans, NextAvenue/The Center for Public Integrity
It’s one of the most regrettable personal finance problems Americans face: Too few of us are saving for retirement.
To discover why, you don’t have to look much further than the structure of the 401(k) era itself. A generation or two ago, most companies guaranteed workers a pension for life. Rewind to 1983, and you find that 62% of private-sector workers had a pension; in 2016, only 17% did. That means that it’s now up to workers—not their employers—to put aside some of their income to grow for their golden years. The best parking spot out there for that cash is in a 401(k), which allows contributions of up to $18,500 a year to grow tax-free and often includes matching contributions from employers. But many American workers who could be feathering a 401(k) don’t even take the first step: starting one. Yes, there’s a lack of financial education about retirement plans, or about how to find money to spare from your paycheck. But the fact that the system requires you to take action is, for my money, one of the biggest barriers.
Any effort to increase retirement saving should be applauded and encouraged.
To make matters worse, most private-sector workers aren’t even offered a 401(k) in the first place. These 55 million Americans who work for smaller companies that don’t sponsor retirement plans—often ones with between five and 25 employees—need another option. Fortunately, several states have been building a promising one: a state-run auto-IRA (individual retirement account) that not only gives these workers a retirement plan, it enrolls them automatically.
The auto-enrollment feature draws on a successful behavioral nudge developed by Nobel Prize–winning economist Richard Thaler. And these state-mandated Roth IRAs allow up to $5,500 a year to grow tax-free forever. Five states have initiated programs—California, Connecticut, Illinois, Maryland, and Oregon. Nine more states, including New York and Pennsylvania, are weighing them.
Great idea. So let’s encourage it, right? Not so fast. Fearing competition from states for lucrative contracts with employers, the financial services industry and their allies in state legislatures and Congress—the same body that considered messing with 401(k)s—have worked to stymie the efforts. Last year, Congress, with the backing of 22 of the nation’s largest financial firms, reversed an Obama-era rule that clarified how states could introduce such plans while complying with federal law. The regulatory rollback could hamper further state efforts in this area.
These state plans are not perfect. The Oregon plan, for instance, charges a relatively steep 1% of the amount you invest for operating costs, and that’s in addition to any underlying fees charged by the investments you choose in the plan. The good news: Most states intend to reduce these fees as more workers sign up.
Any effort to increase retirement saving should be applauded and encouraged. In a world where would-be savers clearly need a helping hand, these state-level stopgaps should be allowed to flourish.