Do state-mandated retirement programs really work?


By Damian Davila

On July 1, 2019, California became the third state — after Illinois and Oregon — to have launched its own state-sponsored retirement savings program available to workers within the state. Since 2012, more than 40 states have considered and proposed legislation state-run retirement programs. With only three states truly having taken the plunge, U.S. workers are wondering whether or not these state-run schemes truly work. Let’s review the state of state-mandated retirement programs so far.

What are state-run retirement plans?

In a recent study, the National Institute on Retirement Security (NIRS) found that 57 percent of working-age households have no retirement assets. And of those that do, only half are adequately prepared for a comfortable retirement.

To respond to America’s retirement savings crisis and help Americans prepare for those later years, many states have created free or low-cost savings programs for small businesses to offer their employees.

Which states are rolling out plans?

Currently, 10 states have passed legislation: California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington. We’ll take a closer look at these plans.

Note: Some states are making enrolling optional, not mandatory. In other words, you have to enroll in a plan, not their plan.

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How do state-mandated retirement plans work?

While these plans are commonly thought of as 401(k)s, this isn’t necessarily true. The majority of these plans are actually Roth IRAs, which have a different set of things to contrast from a competitor offering another 401(k):

  • 401(k)s are pre-tax vs. Roth IRAs are post-tax

  • 401(k)s have a higher annual contribution limit vs. Roth IRAs

Here’s a quick breakdown of the models some states are deploying:

Type of planStates using this modelCompared to a 401(k)
Roth IRACA, IL, NY, ORLower annual contribution limit, contribution restrictions based on income.
Multiple Employer Plan (MEP)MALess control over plan design, higher potential for abuse.
MarketplaceWADoesn’t directly offer retirement plans or list your options (or their pros and cons).

For more information, read our blog: IRA vs Roth IRA vs 401(k): What’s the difference?

OregonSaves – The Pioneer

First mover advantage, indeed. Over two years in operation, OregonSaves appears to meet the expectations from both state legislators and constituents. According to the Oregon State Treasury, 7,408 employers have registered to facilitate OregonSaves for their employees and 104,348 employees (71% of those eligible) have enrolled in the program, as of August 1, 2019.

  • From the 48,800 plan holders who have begun making contributions, 91.8% currently have funded accounts

  • The average contribution is about $100 per month.

  • Assets in the program exceed $25.5 million

  • Average savings rate is currently 5.53% (the default rate in the plan is 5%)

As of November 2019, Oregon workers have opened more than 54,000 accounts with Oregon Saves. Participation rates of Oregon residents are pretty even county to county, without any significant difference between urban and rural residents, according to data from the Oregon Retirement Savings Board.

However, there is still plenty of room for growth. In 2017, the Oregon State Treasury had estimated that as many as 1 million Oregon-based workers could benefit from this retirement savings program. State officials originally estimated that 64,000 Oregon-based businesses (most of them small businesses) would have employees eligible to participate in this retirement savings plan.

So, why haven’t more Oregon workers signed up for the state-run savings program? In this case, too much planning from legislators may have gotten the best of them. Under its original schedule, owners of businesses with under five employees would have to wait until May 15, 2020, to register. The registration deadline for businesses with five to nine employees was originally scheduled for November 15, 2019.

On July 1, 2019, OregonSaves became self-supporting and jump-started the program. The Oregon Legislature helped fund the startup of OregonSaves through loans from the state’s general fund. The loans, totaling about $5 million, covered the period between the passing of the enabling legislation in 2015 and June 30, 2019. OregonSaves is no longer dependent on the state’s general fund and is no longer spending any loaned funds.

This is why, in mid-July 2019, OregonSaves sent early notices to employers with five to nine employees about the registration deadline on November 15, 2019. So far, 766 employers with five to nine employees have registered to facilitate OregonSaves. At this point, any Oregon-based businesses can register their employees at Oregon Saves and the Oregon Retirement Savings Board keeps a positive outlook on the future of the savings program.

Learn more about other alternatives:

Illinois Secure Choice – The Cautious planner

Planning to provide a workplace savings plan to employees without access to such a plan, Illinois Secure Choice is a program offered to Illinois businesses with at least 25 employees that have been in business for two or more years. While the Illinois-run savings program was slated to start earlier than that of Oregon, a measure was later enacted that delayed enrollment of Illinois workers until November 1, 2018.

Like many administrators of state-run plans around the country, the Illinois Treasury opted to wait to find out the initial results from OregonSaves. The main reason is that the Illinois Secure Choice Board estimates that up to 2.5 million workers in Illinois could benefit from the savings program.

Due to the larger pool of potential plan holders, Illinois Secure Choice is limiting access to the plan in two ways. First, the plan is only mandatory for businesses with at least 25 employees (OregonSaves requires businesses with at least 5 employees but allows businesses of any size to voluntarily join). The current deadline for businesses employing 25 to 99 workers to register for Illinois Secure Choice is November 1, 2019. Second, Illinois Secure Choice only offers a Roth IRA. This way high-income earners and workers who wish to save for retirement with pre-tax dollars may be discouraged to participate in the plan.

The extra planning from the Illinois Secure Choice Board appears to have paid off in terms of lower cost and access to initial investment options. The plan charges workers an annual fee of approximately 0.75% of assets per year ($0.75 for every $100 saved) to cover the administration of the program as well as the operating expenses charged by the underlying investment funds in which the program’s portfolios are invested. In comparison, the annual fee from OregonSaves is about 1% of assets per year ($1 for every $100 saved). Employers pay no fees at either program. Illinois savers have access to a range of target-date funds, a bond fund, an equity index fund, and a pair of money market accounts.

As of the time this article was written, the Illinois Treasury hasn’t released details on the performance of its savings program. The Human Interest team will keep an eye on future updates.

Check out our related article for a deeper dive into Illinois Secure Choice.

CalSavers – The Litmus Test

Potentially covering an estimated 300,000 businesses and up to 7.5 million workers, the CalSavers Retirement Savings Program is a key indicator of whether or not state-mandated retirement programs can work.

CalSavers first launched in November 2018 with a pilot program and to all eligible employers beginning July 1, 2019. The current registration schedule is as follows:

  • Over 100 employees: September 30, 2020

  • Over 50 employees: June 30, 2021

  • Five or more employees: June 30, 2022

The latest snapshot of the CalSavers pilot study showed that 121 employers have registered, 1,727 accounts have been funded, and a total of $382,955 assets are being managed. The current sample showed a sign-up rate of about 75% of eligible workers and an average monthly contribution of 4.97% of monthly income. Given that the pilot program has only been live for less than a year, It’s still too early to determine whether or not the program is working. However, one potential red flag is that there have 94 full withdrawals so far.

One positive sign from CalSavers is that like Illinois Secure Choice, it has been able to lower the administrative charge to plan holders. The current fee of CalSavers is approximately 0.825% to 0.95% per year, depending on investment choice. This means a Californian worker will pay between $0.83 and $0.95 per year for every $100 in his or her account.

The Human Interest team will keep an eye on future report releases from the California Secure Choice Retirement Savings Investment Board. In the meantime, you can learn how CalSavers works here.

Other States & Their Plans

Currently, state legislatures in Connecticut, Maryland, Massachusetts, New Jersey, New York, Vermont, and Washington are evaluating their own versions of retirement savings programs. While most of the state authorities have taken cues from those in California, Illinois, and Oregon, it’s important to point out two differences in their approaches.

Unlike most states, New Jersey and Washington are not making participation in their respective plans mandatory. New Jersey allows employers with fewer than 25 employees to participate in the plan but it doesn’t require them to do so. Washington takes it a step further by making nothing mandatory: offering a retirement plan is voluntary for employers and participating in a retirement plan is voluntary for employees.

Additionally, Washington borrowed a play from the implementation from the Affordable Care Act (ACA) back in 2013 and offers an online marketplace with low-cost retirement savings plans that have been verified by state officials. In its current iteration, the online marketplace simply allows for easy search and then links to various providers’ sites so that Washingtonians can identify the best option for their savings needs and goals.

Takeaway: The Next Three Years Will Be Key

The reality is that it is still too early to determine whether state-mandated retirement programs really work. Retirement savings is a marathon, not a sprint. And as such, the three currently live state-run savings programs need more time to show their true performance – and other programs are still yet to go live.

Once CalSavers is available to all eligible workers on June 30, 2022, we should have a better understanding of whether or not state-mandated plans work. If CalSavers and other state plans were to meet their self-imposed deadlines faster, then that would definitely be a sign of good performance.

In the meantime, Illinois Secure Choice and CalSavers are showing that lowering plan fees and broadening investment options appear are important factors for the successful adoption of state-run savings plans.

If you’re a small business owner and the prospect of providing a workplace retirement savings plan to your employees excites you and you don’t want to wait until your state creates one, then take action now and start shopping around for ways to provide a much-needed benefit for your employees. Consider Human Interest in your search and send us any questions about 401(k) plans you may have, we’d love to help!

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Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.

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