By Brian Skinner, Esq.
Many Americans are financially unprepared for life after work. A report from the U.S. Federal Reserve found that nearly a quarter of all American adults have no retirement savings or pension at all. The data shows that 42% of people aged 18-29 have no retirement savings, along with 26% of Americans in the 30-44 age bracket. Among those closer to retirement, 17% of people aged 45 to 59 report a complete lack of retirement savings and that figure is 13% for those aged 60+.
When it comes to self-assessed preparedness for retirement by age, less than half of people aged 60 and over think that their savings are sufficient for retirement. Unsurprisingly, younger Americans are even more pessimistic, with only 42% of people aged 45-59 and 35% of those aged 30-44 feeling prepared.
Policymakers at the state and federal levels have been trying to solve what’s known in the retirement industry as the coverage gap — the large portion of workers in the private sector who don’t have access to a workplace retirement plan. The Pew Charitable Trusts estimates that roughly 30% of private-sector workers lack access to a workplace plan. Research indicates individuals are much more likely to save for retirement if there’s a retirement plan available at work.
A study from the nonpartisan Employee Benefit Research Institute may help. It suggests that an auto-IRA program would a way to address the “cover gap” by significantly reducing the U.S. retirement savings shortfall, especially among young workers.
Oregon was the first state to enact an auto-IRA program, OregonSaves, in July 2017. The program mandates that employers in the state that don’t sponsor a workplace retirement plan, automatically enroll employees in a Roth individual retirement account that is administered by the state. After registration and setup, a business’s only responsibility is to process the employee contributions through payroll deductions. Both existing and newly hired workers are enrolled automatically, although they can decide if they want to participate. Contributions are after-tax investments made to a Roth IRA, owned and controlled by the employee. More than 58,000 workers have accounts with the Oregon auto-IRA, which had more than $40 million in combined savings at the end of 2019.
The Employee Benefit Research Institute study found that if the OregonSaves program was applied nationwide, the $3.83 trillion aggregate retirement savings deficit among American households would fall by 12% or $456 billion. The largest impact would for households headed by those between 35 and 39 years old who would see their retirement savings shortfall reduced by 16.3%.
Several states, in addition to Oregon, have enacted legislation to create automatic-enrollment, payroll-deduction IRA programs for such private-sector workers, including California, Connecticut, Illinois, Maryland and New Jersey. Not all of the states have adopted identical plans. For instance, Oregon’s auto-IRA program requires employers of all sizes to participate, while Illinois’ plan would cover fewer people since it exempts employers with fewer than 25 employees.
A recent survey conducted for The Pew Charitable Trusts found that many Oregon businesses taking part in the state’s new retirement savings program expressed positive views of OregonSaves. Slightly more than 2,500, about 22% of the 11,740 employers contacted, responded to the survey. Overall, nearly three quarters or 73%, said they have had a positive or neutral experience with OregonSaves when asked about both the registration and ongoing facilitation of the program.
The setup process and ongoing operations were designed to minimize burdens on employers. The Pew survey found that a large percentage of businesses said they were satisfied with or did not feel burdened by various aspects of the registration process and the ongoing experience. OregonSaves does not charge businesses any participation fees, and 79% said that they have not experienced any related out-of-pocket costs. Eighty percent also said that they are hearing only “a little” or “no questions at all” from their employees about OregonSaves which might be because the program’s client service team offers assistance directly to employees.
Because OregonSaves was launched in 2017, not enough time has passed to assess the success of the program. But this approach is likely to increase the number of savers early in their careers and they will be better prepared for retirement. The program also helps smaller businesses provide a workplace benefit common at larger firms.
Arguably, a program like OregonSaves will result in more workers with retirement savings, reducing the long-term burden on taxpayers over time. Additionally, because of the portability of the accumulated assets, financial service providers who might consider the program as unfair competition, will likely see more clients.
In 2012, the West Virginia Voluntary Employee Retirement Accounts Program was introduced in the West Virginia House of Delegates. The bill would have created a voluntary tax deferred retirement plan for nongovernmental employers and employees in West Virginia who are without a retirement plan. Participation by employers and employees would be voluntary. The bill was never taken up.
Given the apparent success of OregonSaves, it might be time for West Virginia to join other states and allow private-sector workers to take advantage of this simple, accessible, and proven way to save. Auto-IRAs are not only a way to help the state's workforce prepare for life after work by addressing the serious problem of the retirement plan coverage gap, but by helping workers retire with sufficient income (defined as replacing less than 75% of working age income), they will require less state assistance.
Brian J. Skinner is the former counsel to the West Virginia House of Delegates Committee on the Judiciary and counsel to the West Virginia Senate Minority Caucus. He has over a decade of experience as an adviser to legislators on legal and political issues related to pending legislation; providing research and legal analysis services to legislative committees; and preparing bills, resolutions, amendments, and other documents for the West Virginia Legislature.