Personal Finance

States to pick up slack on retirement savings as feds back out

Key Points
  • The Treasury Department is eliminating Obama-era myRA accounts due to cost and lack of interest.
  • Oregon is wrapping up the first month of its new program, now in a pilot phase.
  • Since 2012, 40 states have acted to implement, study or consider legislation to establish similar initiatives.

Several states are plowing ahead with efforts to give more people access to retirement savings accounts, even as the federal government shuts down a program that aimed to do the same.

On Friday, the 30,000 participants in the Obama-era program — called myRA and intended for people with no access to workplace savings plans — received notice of the closing. The Treasury Department cited low demand and taxpayer cost as reasons for ending the initiative.

At the same time, Oregon is a month into the first pilot phase of its program, called OregonSaves. The law that created it requires employers to sign up their workers (who can opt out) for payroll deductions that go into an individual retirement account. A handful of other states — including Illinois, Maryland, Connecticut and California — are in the process of implementing similar strategies.

Thomas Barwick | Iconica | Getty Images

In fact, since 2012, 40 states have acted to implement, study or consider legislation to establish state-facilitated retirement savings programs, according to Georgetown University's Center for Retirement Initiatives.

Some of the approaches mirror Oregon's, while others take a different tack, yet they all have the same goal: To increase retirement savings among Americans by giving them access to financial vehicles available at the workplace.

Recent data from the U.S. Census Bureau show that just 14 percent of all U.S. employers offer their employees a 401(k) plan or similar savings option.

Employees at the remainder are left to fend for themselves.

"That's the group we're trying to help," said Joshua Gotbaum, chair of the Maryland Small Business Retirement Savings Board and a guest scholar of economic studies at The Brookings Institution. The panel is currently searching for an executive director and expects to begin enrollment no earlier than the end of 2018.

These programs have all sorts of safety mechanisms in them. We've worked very hard to make sure everything is in place to provide for very strong governance.
Lisa Massena
executive director of OregonSaves

Despite the rise of these strategies, strong opposition from various business groups and the financial services industry continues. Part of the problem, critics say, is that unlike workers in 401(k) plans, participants in programs such as Oregon's are not afforded protections under a federal law known as the Employee Retirement Income Security Act, or ERISA.

At least one group hasn't ruled out a legal challenge to OregonSaves. "We are considering all options," a spokesperson for The ERISA Industry Committee wrote in an email.

In simple terms, the law protects 401(k) plan participants by imposing so-called "fiduciary" requirements on employers. That is, companies are bound by law to ensure, among other things, that the investments are in the best interest of the workers.

Hidden 401(k) fees
Hidden 401(k) fees

The way OregonSaves is constructed involves a payroll deduction that is allowed under ERISA and comes with no fiduciary requirements imposed on the employer. And although the Obama administration had created a provision to protect these programs from legal challenges, that carve-out was removed in May by congressional lawmakers.

Supporters think the concerns are overblown.

"These programs have all sorts of safety mechanisms in them," said Lisa Massena, executive director of OregonSaves. "We've worked very hard to make sure everything is in place to provide for very strong governance."

So far, Massena said, the first month has demonstrated how workplace options boost savings. Of the 160 eligible employees, 37 workers (23 percent) opted out. Of those, 12 did so due to already having a retirement account.

For the second pilot phase — registration for it starts Aug. 15 — 42 employers are interested, representing 2,189 employees, according to program data. The size of the companies ranges from three employees to 570.

Recruiting and retaining staff is really important at a company like ours. This gives us a tool to compete for people.
Kevin Max
founder of Statehood Media

Participants in OregonSaves establish Roth IRAs, which are invested in target-date funds managed by State Street once their account balance is at least $1,000. Until then, their money goes into a trust invested in a State Street money-market fund.

Among the companies participating is Statehood Media in Bend, Oregon.

"I have a lot of younger people on staff who hadn't started saving yet," said Kevin Max, founder of the 14-person company. "They've been really enthusiastic about it.

"We have 100 percent participation."

One of the aspects of the program that appeals to Max is that it imposes no administrative headache or cost on him. He also said that as a small business, it should help him attract talent.

"Recruiting and retaining staff is really important at a company like ours," Max said. "This gives us a tool to compete for people."