Slowly but surely, states are adopting programs to ensure pension coverage for people whose employers do not. The plans in force grow with participation and assets, but what does an industry insider think?
To gain insight into what the private sector service provider thinks of state retirement plans, Chad Parks, founder and CEO of Ubiquity Retirement + Savings, a service provider that has worked with more than 100,000 employees, offers its perspective on these plans and their impact on retirement planning of individuals and small businesses in the retirement industry.
“First and foremost, the fact that 20+ states have or are considering a willingness to retire within their borders to raise awareness of the impending pension crisis is a big step in the right direction,” Parks says. He suggested, they have different impacts in addition to simply ensuring that workers have at least some retirement income.
Discouraging for the private sector?
Even before the foreground began to work, “when states just dipped their fingers in the solutions assigned to it by the state,” as Parks says, he says most of the existing large service providers opposed the idea.
Would passing a state plan cause the employer to offer the plan to stop with that?? Parks acknowledges that “there are some areas of concern,” but says he also doesn’t think government programs are encouraging private sector employers offering retirement plans to stop it. This, he says, is because “there is flexibility and choice in government programs, but they are designed to be a basic option, which is not necessarily the best thing for all small business models. We don’t see people giving up on their customized, intricate plans for a basic offering. ”
Parks also doesn’t think state plans create a disincentive for private sector employers to offer the plan. “While there has been talk about whether state plans will outperform other types of plans, I don’t anticipate that will happen,” he says. He actually claims the opposite: not only do state plans provide more opportunities, but their existence raises awareness and “shows which companies are willing and able to step up and do their part to end the pension savings crisis.”
Furthermore, says Parks, “state-mandated programs stimulate demand because they offer a solution that is good for some companies, but not a perfect solution for all company needs.” He continues: “Most of the programs went through the Roth IRA, which deducts from payroll taxes. It is a low price for the employer, but a higher price for the employees. Private sector plans, he says, offer “greater flexibility of plans through more affordable options.”
Early assessment
So far, state pension plans work in Oregon, California, and Illinois, and are being built in multiple states in different regions of the United States. Of those currently functioning, Parks says: “Early programs try not to be too aggressive. They look at the average earnings of individuals in the area (say $ 40,000) and deduct 3% of that salary ($ 1,200) divided by 12 months a year ($ 100 a month) for about 30 years, bringing them to about $ 36,000. Given the growth of the market in the equation, an individual may have approximately $ 50-60,000 in personal retirement savings when it comes time to retire. ”
That figure may seem small if viewed from the perspective of decades of retirement, but Parks says, “What I’ve learned is that the money he saves along the way makes a big difference. Most people collect social security, and perhaps a pension, but this savings need to be supplemented by a nest that has been accumulated to have enough money to support themselves until retirement. If an individual starts with a 5% salary deduction and an automatic increase every year, he slowly starts saving more and at the end of his career finds himself in a bigger balance without even realizing it. ”
Federal engagement
“The federal government is trying to steer the policy to get more people involved in the pension system,” Parks said, citing the SECURE Act and SECURE Act 2.0, which take “a step further by increasing the tax credit from 50% to 100%” in hopes of more small businesses will be able to participate. ”
And if the federal government establishes a mandate that employers must offer a pension plan to their employees? Such a mandate, Parks says, “would order companies with a certain threshold of employment for a certain number of years to offer at least an IRA – with the goal of saving everyone for retirement.”
Parks imagines that the federal mandate is not another program, but a mechanism that would instead monitor companies to ensure that they offer some kind of pension savings through the private sector or the state program. It does not provide for such a mandate as a replacement or oversight of state programs; he sees something like filling in the gaps and supplementing state plans. “Ultimately, this would lead to many more companies taking retirement savings seriously and providing more solutions to their employees,” Parks said.
Bigger picture
State pension plans have effects beyond the stated goal of providing individuals with at least a portion of their pension income, Parks suggests.
“State-mandated programs are forcing the industry as a whole to wonder how to become part of the solution,” he notes. “This development is forcing existing large suppliers to figure out how to serve a larger audience (including large and small businesses) in a cost-effective way with the same technology and oversight that was originally made only for larger plans. These are solutions that complement a state program that will benefit everyone. ”
Parks pointed out that while state pension plans may not be a cure, they do have positive and impact effects as well. “While these programs will not be able to solve the problem of pension readiness on their own, they encourage solutions that are evolving in the pension market and motivate the private sector to come up with their own solutions,” he says. “In the end, it will attract more individuals into the pension savings system, which is the main political goal of the states that bring these plans,” Parks claims.
