Personal Finance

More states set to offer retirement plans

California may offer retirement plans
California may offer retirement plans

More than half of American workers roughly 55 million don't have access to a retirement savings plan on the job.

While those people can open an individual retirement account with an investment company, less than 1 in 3 American households has an IRA and even then most of those people have access to an employer-sponsored plan such as a 401(k).

The California state Assembly on Thursday approved a bill that would enroll employees who are not covered by an employer-sponsored retirement plan at work into a state-run one. A similar measure has already passed the state Senate. The legislature, which is controlled by Democrats, will now have to reconcile the bills before sending the proposal on to Democratic Gov. Jerry Brown, which he is expected to sign.

California, the nation's most populous state, is not alone. Since 2012, more than half of state legislatures have considered bills that would create government-run retirement plans for private-sector workers:

  • Connecticut, Illinois, and Oregon have passed laws to create state-run plans for private-sector workers, which will be available next year. Maryland's plan will be implemented in 2018.
  • Massachusetts provides a retirement plan for non-profit workers and is studying the feasibility of one for private-sector employees.
  • Washington state established an online marketplace and New Jersey will follow suit next year.

In addition, the Obama administration on Thursday announced that the Department of Labor issued a rule to encourage states and some large cities and counties to offer government-run retirement plans for private-sector workers.

California's plan

The California plan would cover an estimated 7.5 million state residents who do not have access to a retirement plan at work. Two-thirds of those people are employed at businesses with less than 100 workers.

The retirement plan would be run by the California Secure Choice Retirement Savings Investment Board. The entity was established in 2012 and is staffed by state officials and political appointees.

For the first three years of operation, the state-run plan is expected to invest in Treasurys and other low-risk debt securities while the board develops more investment options for plan participants.

All employers in California with five or more employees who do not offer their workers a retirement plan would be required to participate.

Workers will be automatically enrolled in the program, with the opportunity to opt out. If employees do not select a contribution amount, 3 percent of their salaries would be automatically contributed to the plan. (That automatic contribution rate is similar to those found in many employer-sponsored 401(k) plans.)

Contribution limits for the Secure Choice accounts would be the same as those for IRAs. In 2016, you can contribute $5,500 to IRA or $6,500 if you are 50 or older.

The program should eventually pay for itself and small-business owners will want to give their employees some retirement security, said Sarah Gill, a senior legislative representative with AARP.

"There is bipartisan support for these bills," Gill said. "It's actually a conservative idea that was developed by the Heritage Foundation."

The Securities Industry and Financial Markets Association, which represents Wall Street, opposes California's plan. Kim Chamberlain, SIFMA's associate general counsel, noted in correspondence with state lawmakers that Californians have plenty of investment options, such as traditional and Roth IRAs, available to them if they do not have a workplace retirement plan.

In fact, 71 percent of California workers who don't have a workplace retirement plan said they managed to save an average of 4.5 percent of their household income for retirement, according to a government-funded report about the feasibility of a state-run retirement plan.

It may be that a lack of income, not a dearth of investment options, is the cause of a retirement savings shortfall for most people. The top reasons Californians gave in the government survey for not saving for retirement were that they did not make enough money or needed to pay off their debts. A state-run retirement plan would not solve those problems, Chamberlain said.

SIFMA favors state initiatives, such as those in Washington and New Jersey, that create an online marketplace to connect small businesses to private retirement plan providers and the federal myRA program.

Federal options

The myRA is a starter retirement plan that works like a Roth IRA except there are no fees and account holders can only invest in Treasurys. Once account holders save $15,000 in their myRAs, they must roll them over into Roth IRAs.

Account holders of myRAs and Roth IRAs do not receive a tax break for their contributions, like those made to traditional IRAs and 401(k) plans. However, withdrawals from myRAs and Roths are tax-free while those from traditional IRAs and 401(k) plans are taxed.

More than 10,000 people have opened myRAs and the average contribution is around $50 per pay period since the program's nationwide launch in November, according to the Treasury Department.

Danielle Vogel, owner of Glen's Garden Market in Washington, D.C., encourages her 90 employees to use myRAs. "I'm constrained by cash flow and I like that I can provide myRA accounts to my employees at no cost," said Vogel, a former Senate staffer who started her grocery business in 2013 and participated in the Treasury Department's pilot program for myRAs in 2014.

Many of Vogel's employees are in their 20s and 30s and aren't yet worried about retirement plans as much as other perks she offers, such as free staff meals and stipends for health insurance. "MyRA is a training-wheels version of a retirement plan that allows me to invest in other benefits," Vogel said.

Some of her employees like the simplicity of the myRA. "I have a retirement account at an old job I still don't understand," said Audrey Groce, 25, director of operations at Glen's Garden Market, who contributes $200 a month to her myRA.

Other workers appreciate how easily they can access funds in a myRA. "With a myRA, I can touch my money if I need to," said Shana Muhammad, 31, who manages one of Glen's Garden Market's two locations and saves $100 a month in her myRA.

Private options

Despite the good reviews by early adopters, myRAs are a drop in the bucket compared to the $4.7 trillion invested in private employer-sponsored 401(k) plans.

The burdens of sponsoring 401(k) plans have deterred many small businesses from offering them. A majority of small-business owners said they felt overwhelmed by the number of plan options, administration requirements and fiduciary responsibilities, according to a 2013 survey by the U.S. Government Accountability Office.

Though administration costs for 401(k) plans have been in decline for more than a decade, the size of a plan's assets usually dictates how much an employer will have to pay to provide the benefit. Employers typically decide how to share those costs with employees. Some small businesses pay all the administration fees while others pass along the costs to workers.

Even when small businesses do provide such plans, their workers pay more than double what employees at larger companies do.

A small 401(k) plan with $10 million or less in assets had an average annual fee of 1.17 percent in 2013 compared to an average fee of 0.58 percent for all 401(k) plans, according to a study by BrightScope, a website that rates 401(k) plans, and the Investment Company Institute, which represents the mutual fund industry.

Several investment companies from start-ups like Betterment to market leaders like Vanguard offer 401(k) plans targeted at small-business owners and their employees.

"We are trying to make 401(k) plans more accessible for every business," said David Ramirez, founder of ForUsAll, a provider of retirement plans that launched last year. "These are must-have benefits."

Update: This story has been updated with the news that the California state Assembly approved a bill to create a state-run retirement plan for private-sector workers.