A significant portion of the adult population working in the U.S. has nothing in store for retirement and the only social security we can look forward to. As a result, several states, as well as the retirement industry, are working to offer retirement plans to employees whose employers cannot afford them. To get some perspective on these initiatives, we turned to Ashvin Prakash, Product Development Director at Ubiquity Retirement + Savings, who oversees the strategic map of travel solutions for small businesses across the country. With more than 15 years of experience in financial services, Prakash is responsible for identifying, designing and launching new products. Founded in 1999, the San Francisco-based company offers flexible, lump-sum retirement plans for small businesses.
AdvantagesPRO: What was the inspiration behind the state retirement program and what does it want to achieve?
Ashvin Prakash: The goal is a universal approach to workplace retirement plans – which means encouraging more companies to offer employees retirement savings opportunities in an effort to cope with the upcoming retirement crisis in America. The initiative was led by U.S. Congressman and Chairman of the Home Travel and Funds Committee Richard Neal, who believed that everyone would need to be able to set aside tax-deferred funds to save for the future.
This has now become particularly important, as we see an aging population that is not ready for retirement due to several factors. The most significant is the broken “three-legged chair” of retirement income, as people have historically relied on social security, pensions and personal savings. Now very few employers offer pensions, and social security is drying up – with funds expected to be spent as soon as 2035. More than ever before, the responsibility for saving falls on the individual.
Other aspects contributing to the upcoming pension crisis include an increase in life expectancy that adds more years to retirement and an increase in health care costs. Finally, the widespread impact of the burdensome student loan debt means that many people find it very difficult to start saving for retirement during their early years of workforce.
How many states have currently adopted state retirement plans or are planning to do so in the near future?
Since 2012, at least 45 countries have implemented or considered establishing state pension savings programs. During the 2020 legislative sessions, at least 20 states and cities introduced laws or formed study groups to explore opportunities. Today, 13 states and 2 cities have enacted new programs for private sector workers.
It is expected to launch the Connecticut, Maryland, Vermont and Colorado programs this year. So far, states have chosen between the Individual Retirement Account (Auto-IRA), the Roth IRA Voluntary Reduction of Wages, the Multiple Employers’ Plan (MEP), online markets designed to connect employers and individuals with plans outside the program, or a hybrid model. Active programs (California, Illinois, Massachusetts, Oregon, and Washington) together held over $ 245 million in assets as of April 30, 2021.
On July 1, 2019, California began introducing the CalSavers program, an automatic enrollment and deduction of IRA salaries for 7.4 million private-sector workers in the state who do not have access to an employer-sponsored retirement plan. 10,243 employers were registered, and 138,590 individuals participated in the plans at an average monthly contribution rate of $ 136.38 as of April 30, 2021.
Employers in California with more than 50 employees will need to enroll in a state IRA or offer a private option on June 30, 2021. As of March 31, 35% of employers must register by June 30, and 70% of employers with more than 100 employees who are should have registered by September 30, 2020, or registered or responded to a request from the state to do so.
How does CalSavers compare to other government programs?
California, Illinois and Oregon have active auto-IRA programs. Under CalSavers, contributions stand in the capital preservation fund for the first 30 days. With Illinois Secure Choice and Oregon Saves, it lasts 90 days. After 30 and 90 days, respectively, the investment is transferred to the target date fund based on the projected retirement age, unless the employee opts for a different investment strategy. This provision helps protect against market instability for individuals who are automatically enrolled by an employer but then choose to withdraw their funds.
CalSavers plan participants are subject to asset-based administrative fees of 0.825% -0.95% compared to the Illinois Secure Choice rate of 0.75% and OregonSaves ’1%.
What happens if the employer does not apply for the plan by the deadline?
In California, $ 250 per employee is fined starting 90 days after the deadline. The fine is increased to $ 500 per employee 180 days after the deadline.
What are some of the biggest challenges in implementing state pension plans?
The first and most important thing was to get employers to pay attention, respond and make decisions in the middle of a pandemic, given that so many small businesses are struggling just to make ends meet. They currently have many important things to navigate and difficult decisions to make.
It is understandable that making retirement plans available to employees may not be at the top of their list of priorities, but they should be. The pandemic also affected the introduction of these programs at the state level. Several states, such as California, have had to move their deadlines, and others are delaying the execution of deadlines.
Boarding is another significant obstacle. Once an employer has applied for the program, a significant amount of handshakes may be required to place themselves on the platform and learn about the steps required to enroll employees and properly submit contributions. This process can take several weeks and can put additional burdens on states and service providers.
In addition, all three states with active auto-IRA programs (California, Illinois, and Oregon) value the programs as an asset-based fee. Given the time required to accumulate funds in these accounts, states and service providers may find themselves challenged to absorb many of the initial costs of these programs (e.g., marketing, boarding). As a result, OregonSaves recently approved a new hybrid pricing model that will charge $ 18 per year plus a 0.25% property fee for each account, and is expected to take effect in the fall of 2021. We may see more states follow Oregon’s leadership is also considering switching to a flat-rate or hybrid approach to pricing to more quickly recoup some of the program’s initial costs.
What are the advantages of enrolling in government programs?
There are several benefits, including 1) no employer costs, 2) no fiduciary risk, 3) lower administrative burden, 4) state representative oversight, 5) automatic employee enrollment, 6) greater portability offered by the IRA, and 7) no management responsibilities investments.
What are the potential disadvantages of enrolling in government programs?
Access to workplace pension savings plans offered by government programs is a major step forward in addressing the impending pension crisis. However, government programs offer fewer adjustments and benefits than private plans. In addition, the annual contribution limit for 401 (k) is approximately three times higher than that for the IRA, which is a typical means of saving in the state program. Higher contribution rates allow savers to take advantage of the power of compound interest, which means that the more money saved, the more it can grow over time and allow savers to achieve long-term financial security.
As previously mentioned, all active government programs currently have asset-based benefits. The flat-rate compensation approach can provide greater transparency and ultimately lower costs to employees as they accumulate. Private 401 (k) plans also tend to offer a wider range of investments and greater flexibility in plan design, while state IRAs have limited capabilities.
There are also more tax breaks for employers offering 401 (k) plans. The Law on the Establishment of Each Community for Pension Improvement (SECURE) stipulates that small businesses can qualify for tax relief of up to $ 16,500 over a three-year period by starting a qualified retirement plan with automatic enrollment.
If the company does not want to enroll in the state program, what are the other possibilities?
Options vary by country, depending on qualified alternative plans. Businesses could offer a private plan 401 (k) or 403 (b), which would allow for greater savings, while providing tax incentives and greater adjustment. Although these products place additional fiduciary responsibility on employers, choosing the right supplier can facilitate much of the administrative responsibility.
Another option is SIMPLE IRA, which would allow participants to save a little more than the state plan and enable employer contributions. Conversely, these plans can be more expensive due to the company’s required matching. Some states, such as California, also allow a private IRA plan to reject payrolls.
Is there any other pension law that could affect the future of retirement programs / state mandates?
There is potential for a federal mandate under Biden’s administration that will require companies to offer employees retirement savings opportunities. Given the degree of support for the idea, which is also led by U.S. Congressman and Chairman of the Household Funds Committee Richard Neal, adoption could happen in the next year or two, leading some states to postpone or even abolish their own mandates.
Another option is an enhanced return for savers, which is currently available in 401 (k) plans for people below a certain income level. An updated law is proposed that would offer a government match of 50% on contributions of up to $ 1,000 per year to 401 (k) or IRAs, regardless of whether an individual owes income tax.
Immediately, Securing a Strong Retirement Act of 2021, a law nicknamed the “SECURE Act 2.0,” could soon experience significant legislative action and I expect strong bipartisan support for it, similar to what we saw with the enactment of the original SECURE Act in late 2019.
What are the key initiatives included in the SECURE Act 2.0 and how could these changes affect the future of retirement savings?
The goal of SECURE Act 2.0 is to make it easier for Americans to save more for retirement. To increase participation in the plans, the law will require employers to automatically enroll eligible workers in plans 401 (k) or 403 (b) at a 3% savings rate, increasing by 1% each year until their contribution reaches 10%. Employees would have the option of declining or adjusting rates. Part-time employees who work at least 500 hours a year would also be eligible to participate in 401 (k) plans after two years, as opposed to the current three-year waiting period.
Savers between the ages of 62 and 64 would also have the opportunity to add an additional $ 10,000 (an increase from the current $ 6,500) to their 401 (k) and 403 (b) plans. SIMPLE IRA participants could contribute an additional $ 5,000 (compared to the current $ 3,000).
THE SAFETY LAW has raised the age that individuals must begin taking the required minimum allocations (RMDs) from traditional IRAs and 401 (k) s from 70 1/2 to 72 years. To increase life expectancy and allow more time for tax-free growth, SECURE Act 2.0 proposes a gradual increase in that age over the next decade, reaching 75 by 2032. The bill also proposes a reduction in the tax penalty for failing to withdraw the mandatory withdrawal of RMD from 50% to 25%.
In addition, employers may be able to adjust part of the student loan payments as a contribution to their retirement plan, even if the employee does not contribute to that plan.
These are just some of the key provisions listed in SECURE Act 2.0. At the moment it is just a proposal and nothing is legally signed. As the law moves through the legislative process, things could very much change.
Initiatives at the federal level, along with the efforts of individual states, will be crucial in helping all Americans exercise their right to a secure pension. While much remains to be done, I am optimistic that we are going in the right direction.