States step in to prod reluctant retirement savers

Imagine hitting retirement, and having your annual income plunge from $30,000 to $13,000. That’s probably not the way most Americans envision their golden years, but it’s the rough reality confronting about 50 percent of the nation’s private sector workers, who have little if any savings and will have to get by on government safety nets alone.

“Half of private America is working full time and have nothing, so when they hit 65 or 70, basically all they have is Social Security, which is on average a little over a grand a month,” said Joshua Gotbaum, a guest scholar in economic studies with the Brookings Institution. Yet, a state-by-state effort to turn around that dire scenario is afoot in what promises to be “the biggest expansion of retirement security since Social Security was created,” said Gotbaum.

Backed in the 2008 presidential campaign by the nominees of both major parties, Barack Obama and John McCain, federal legislation was proposed that would have set up automatic enrollment into Individual Retirement Accounts (IRAs) for private sector workers who don’t already have access to a retirement savings plan through their employers. Support for the proposal lost steam in the wake of partisan bickering and opposition from the financial services industry.

A handful of states have since picked up the auto-IRA campaign, looking to offset the economic impact of having large populations of impoverished elderly residents forced to rely on state services. The measures vary, but by-and-large require employers that don’t offer retirement benefits to conduct a payroll deduction but also allow employees to opt out of the plan. 

“Congress didn’t like it because it’s supported by Obama or because you’d require employers to do something, so it got stuck,” said Steven Sass, program director of the Financial Security Project at the Center for Retirement Research (CRR) at Boston College. “Now it’s the states, and these are serious efforts. It’s the next and best initiative we have going forward.”   

The Department of Labor (DOL) in late August gave an all-clear signal to efforts well underway in at least five states and issued a final rule essentially paving the way for laws setting up automatic enrollment into IRAs for private sector workers who don’t already have access to one through their employers.

“As a result, some states are busy following this through,” said Gotbaum of the DOL’s rule, which opened the door to the implementation of legislation passed in Illinois, Oregon, California, Connecticut and Maryland. The earliest of the programs are expected to be live in the summer of 2017.  

“This is the whole nudge movement,” said Sass, also a former economist at the Federal Reserve Bank of Boston. The employee contributions made via auto enrollments are put into Roth IRAs, which hold after-tax money that can be withdrawn without a penalty. That means such funds could be used as an emergency savings account rather than just a retirement account.

Geoffrey Sanzenbacher, a research economist at the CRR, argued that low-wage workers tapping into the accounts ahead of retirement isn’t necessarily a bad thing. “If somebody uses it to repair a roof after flooding, then better than using a credit card.”

Efforts to pass auto-IRA laws failed in Washington state and New Jersey, both of which instead adopted measures the financial services industry backed that involve creating websites where companies offering retirement plan options can list their services.

“We are not supporters of state-run retirement plans that eliminate the opportunities for financial advisers to provide advice and guidance to investors,” said David Bellaire, executive vice president and general counsel at the Financial Services Institute (FSI). “The state-run plans that the DOL rule is opening the door to do not provide a role for financial advisers, and instead substitute with a one-size-fits-all approach.”

The move at the state level is an effort to fill a void created as corporations that in decades past offered pension plans as a benefit to retain employees decided to drop them in favor of 401(k)s, in which employees decide how much to contribute and how to invest those funds. Other companies don’t offer any savings plan to their workers.

The DOL’s ruling means that corporations don’t have to shoulder any fiduciary responsibility in opening their payrolls to automatic deductions, while states don’t want to be running the actual administration of the programs, and most will contract the work out, which means the financial services industry could indeed garner work as a result. 

Still, the FSI’s Bellaire argues that workers have little need for auto-enrollments because “options for savings for retirement are readily available.” 

While true, the human trait of putting things off or avoiding one’s fears is on full display when it comes to planning for retirement. A survey released in July found the top retirement fear workers have is running out of money before they die, but that worry seemingly hasn’t prompted Americans en masse to start saving for their golden years.

Roughly half of U.S. workers might not have enough savings to maintain their standard of living after they retire, estimates the CRR. And about half of the nation’s workforce aren’t offered a pension, 401(k) or other retirement savings vehicle through work.    

“If an employer doesn’t offer a retirement savings plan, people don’t save,” said Gotbaum with the Brookings Institution. “As a result, half of America isn’t saving for retirement.” 

Americans aren’t unique in their inability to save, but the U.S. does deviate from many other Western industrialized nations in not having a government-mandated system of automatically enrolling citizens who don’t have retirement savings accounts. Gotbaum pointed to Britain, for instance, which allows workers to opt out, but he said more than 90 percent don’t.