Momentum builds for requiring workplace savings plans
Having access to a retirement plan through one’s employer greatly increases the likelihood that workers will save for retirement, and increasing employer-based retirement plan coverage has long been a goal of policymakers. But while some progress has been made, there is a growing sense that more needs to be done.
The lack of workplace retirement plan coverage
The lack of retirement plan coverage is especially pronounced for workers at small companies and for some racial and ethnic minorities. According to the U.S. Bureau of Labor Statistics, 35% of private sector workers—around 43 million Americans—work for firms with fewer than 100 employees.1 But only 48% of those firms offer retirement plans to their workers, compared with 94% of firms with 500 or more employees.2 The Federal Reserve has reported that while 68% of working-age White families have access to a retirement plan at work, only 56% of Black and 44% of Hispanic families have access to such a plan.3 So tens of millions of U.S. workers cannot get a retirement plan through their employers.
From incentives to mandates
Until recently, most of the policy measures to address the lack of retirement plan coverage have involved tax incentives to encourage employers to establish plans. A recent example is a provision in the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 that increased the maximum new plan startup credit for small employers from $500 to $5,000.4 But lately, an increasing number of states have started to address the issue differently by mandating that employers without retirement plans automatically enroll their employees in a payroll deduction IRA program sponsored by the state. Eight states have enacted laws requiring the creation of these programs, often referred to as “mandatory auto-IRA” programs. California, Illinois and Oregon have launched their programs, and Colorado, Connecticut, Maryland, New Jersey and Virginia are developing them. So far, more than half of the states have either enacted mandatory auto-IRA laws or have had bills introduced in their legislatures to create them—and this despite a court challenge alleging California’s program is invalid because the law establishing it is preempted by ERISA.5
State mandatory auto-IRA programs: Basic structure
Although they vary somewhat in their details, the state mandatory auto-IRA programs follow a similar pattern: A statute enacted by the state’s legislature calls for the establishment of a board that is charged with designing and overseeing the program, promulgating rules, selecting service providers and choosing the investment menu. Employers that don’t maintain 401(k)s or other retirement plans for their workers must sign up with the program. After providing information about the program to their employees (including instructions on how to opt out), employers must deduct a specified percentage from the employee’s pay—5% in some programs—and remit that amount to the program to be invested in a Roth IRA in the employee’s name. The default investment option is typically a target date fund. In each following year, employers must automatically increase the amount of the employee’s payroll deduction—typically by 1%—until a maximum percentage, specified by the program’s rules, is reached. Employees can opt out, choose a different contribution percentage or select an investment other than the default. Employers cannot make matching or other contributions to employees’ IRAs. Under most of the programs, the state can levy a penalty on noncompliant employers. For example, the Illinois mandatory auto-IRA statute provides for an annual penalty of $250 per employee.
The potential of a federal mandate through The Automatic Retirement Plan Act
There is some movement at the federal level to require employers to maintain plans. Last fall, Representative Richard Neal (D-MA), chairman of the House Ways and Means Committee, floated a proposal similar to one he had made in 2017 for a national mandate.6 Under Neal’s Automatic Retirement Plan Act, businesses with more than 10 employees would have to maintain a plan that automatically enrolled participants with a starting contribution rate of at least 6% of pay, with an automatic 1% annual increase up to 10%. Plan participants at firms with more than 100 employees must have the option to elect a guaranteed lifetime income stream for at least half of their account. However, plans that had been in existence for at least one year as of the date of the bill’s enactment would not have to adopt these design features.
Unlike the proposed enhancements to the retirement system in “SECURE 2.0,” which enjoy broad bipartisan support,7 making retirement plan adoption mandatory for most employers is not likely to gain much traction with Republican members of Congress; the fate of a proposal like Representative Neal’s is uncertain. Nonetheless, we expect more states to pursue mandatory auto-IRAs and other legislation to help give more workers access to a workplace retirement savings program. The prospect of being required to participate in a state-mandated program may prompt some employers to establish a 401(k) or other type of plan that can provide more generous benefits for employees.
1 U.S. Bureau of Labor Statistics, “National Business Employment Dynamics Data by Firm Size Class.”
2 U.S. Bureau of Labor Statistics, “National Compensation Survey: Employee Benefits in the United States.”
3 FEDS Notes, “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances,” September 28, 2020.
4 SECURE Act Section 104, amending Internal Revenue Code Section 45E.
5 Howard Jarvis Taxpayer Association v. The California Secure Choice Savings Program, pending before the U.S. Court of Appeals for the Ninth Circuit.
6 Automatic Retirement Plan Act of 2020 discussion draft, released November 16, 2020.
7 See our 1Q 2021 Legislative and Regulatory Bulletin for a description of key provisions of SECURE 2.0.