States Help Small Businesses Set Up Retirement Savings Plans

A flurry of state laws and bills would allow employees of small businesses to set up Individual Retirement Accounts (IRAs) through state-sponsored programs, making it possible for workers to save with automatic payroll deductions even when their companies don’t offer that option.

Just this year, 17 states are considering bills that would provide access to IRAs to workers whose employers don’t offer such plans. Ten states recently implemented plans or are in the process of setting them up. The state plans don’t require employers to match contributions.

The AARP’s Public Policy Institute says employees are 15 times more likely to build retirement savings if they have automatic payroll deductions at work. But such plans don’t exist for about 55 million American workers, mostly in small or medium-sized businesses, AARP’s research found, and that’s where the states can have an impact.

“For employers who don’t offer their own plans, these help address a lot of things that are barriers,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University in Washington, D.C. “This takes all of the responsibility off the employer and connects employees to a vehicle to save for retirement.

“Post-COVID, with such a tight workforce and competition for workers, it’s becoming even more important,” she added. “It helps level the playing field in a very tight job market and allows them to compete for workers.”

In 2019, California implemented one of the first state-sponsored IRA plans and the number of participants has grown steadily. In December 2021, it recorded a record high with nearly 220,000 workers with accounts.

Ten states have automatic contribution plans, according to the Center for Retirement Initiatives, including California, Illinois and Oregon. Connecticut launched its program April 1.

Colorado’s pilot program is set to launch in October and will be fully implemented in 2023. Maryland’s pilot program is anticipated to start in June, with the program projected to be fully up and running next year, Antonelli wrote in an email.

Last year, Maine, New York and Virginia also launched programs.

In Pennsylvania, the state would provide regulatory oversight and contract with a private financial firm to manage participants’ investments. State Rep. Michael Driscoll, a Democrat who is cosponsoring the bill, said he first introduced it six years ago, when about two million Pennsylvanians didn’t have access to retirement plans.

The Pennsylvania plan would apply to any business with five or more employees. Many larger businesses do have automatic contribution plans and some even match their workers’ payroll deductions, Driscoll said, but the state-run program would at least “provide for some that don’t have what the big guys have.”

The primary sponsor of the bill is state Rep. Tracy Pennycuick, a Republican. The programs are for workers who “fall through the cracks,” said Pennycuick in a phone interview.

Although there are a lot of IRA products on the market now, she said, it takes time for employers to sign up and run the programs. A state plan that takes over administrative responsibilities, she said, could make the difference for small businesses in deciding whether to offer the programs.

But a report last month from the Congressional Research Service noted that some fear the state plans could replace existing employer-sponsored plans and the benefits that go with them.

Opposition has come from the insurance industry which, Driscoll said, is worried about losing potential clients. Insurance companies are among the entities, along with financial institutions, that contract with businesses to provide IRA plans for employees.

Bianca Alonso Weiss, state government relations manager for the National Association of Insurance and Financial Advisors, which has opposed the state-run programs, said in an email that the trade group “appreciates that states are looking for solutions to encourage more retirement savings.” But Weiss noted that at least one research paper from the University of Pennsylvania, focused on Oregon, showed that by April 2020, over 50% of state-run accounts were inactive or had a savings rate of 0%.

Furthermore, she said, low wages and high turnover among small companies’ workers limit what such programs can achieve.

But the same paper found that while contributions dwindled in Oregon’s IRA plan in April 2020, it was likely due to job losses in the pandemic, not a failure of the program.

“Opt-out rates rise with the local unemployment rate and the volatility of industry income, and employees in industries with lower earnings are more likely to cite that they cannot afford to save when opting out,” the authors wrote. “And, during April 2020, we observe a large drop in contributions that we attribute to COVID-19 related job losses and economic uncertainty.”

A study by The Pew Charitable Trusts found that 80% of employers who participated in the program in Oregon did not report any extra costs. Pew, which funds Stateline, has supported state IRA programs in multiple states.

In addition, further research by Pew going back to 2016 found that lower-paid and minority workers were least likely to have an automatic retirement savings plan at work.

The federal government also has taken note of the lagging retirement savings rate in the nation. This month, the U.S. House approved a bill designed to expand IRA coverage and change some of the rules governing the programs to benefit savers.

The Secure Act includes an automatic enrollment provision like the ones in state plans. It also would increase the mandatory age at which retirees must begin to withdraw their savings to 75 and provide a way for older retirees with few dollars saved to make bigger “catch up” contributions to their IRAs.

In Hawaii, representatives of the insurance industry, including the American Council of Life Insurers and the National Association of Insurance and Financial Advisors, testified against a similar bill during state Senate hearings in February.

The Hawaii Senate approved the bill, but a House panel modified the bill to make it entirely voluntary for workers, leading to uncertainty about the bill’s future.

The insurance industry seems “to have the ear of a number of influential legislators in the House,” Craig Kugisaki, an attorney for the state’s Committee on Labor, Culture and the Arts, wrote in an email.

Driscoll, the Pennsylvania legislator, said failing to pass an IRA bill for lower-earning workers is shortsighted, because without retirement savings, older folks will have to rely on government-funded programs to live.

“If we don’t have a program like this now, government is going to be paying the bill 30 years from now,” he said. “If we do nothing, a whole segment of the Pennsylvania population that’s going to be on government programs. We want people to retire with dignity—this can help.”

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