The state of Minnesota is looking for a consultant to figure out the feasibility of a state-sponsored 401(k)-type retirement savings plan that would serve private-sector workers without access to something like that at work.
In reviewing the request for proposal, having had a 401(k) account for 31 years doesn’t appear to qualify me as an expert. But the answer seems pretty clear.
Of course it’s possible. It’s even easy. But do we want the state to jump into a market already served by the likes of Securian and Ameriprise?
Creating a retirement plan for private workers is not an idea unique to Minnesota, as policymakers in many states have grown frustrated by the retirement finance system that seems to be failing so many workers. Earlier this month, Illinois became the first state to actually jump into the retirement plan business for workers in the private sector.
Starting in two years, Illinois workers at any company with more than 25 employees but without access to a retirement plan will be automatically enrolled by their employers in the Secure Choice Savings Program. This will be essentially a state-run 401(k) plan with accounts funded by an automatic 3 percent deduction from wages.
The money will belong to the workers, not the state, and employees can save more than 3 percent of wages if they want. Employees who want nothing to do with it would have to opt out.
The move has generated lots of favorable press, from the New York Times on down. It’s a retirement plan for people without one, with the promise of enough fees that it won’t cost Illinois taxpayers a nickel. So, who could possibly have been opposed?
Well, the Illinois business community, for starters.
“We had quite a coalition of diverse employers who were very much opposed and worked it until the very end,” said Todd Maisch, president and CEO of the Illinois Chamber of Commerce.
Supporters “talked about making the burden as small as possible, but it’s still another one on top of everything else that a small-business person has to do,” he continued. “And it’s up to employers to tell their employees why their paychecks are smaller than they thought they would be.”
Maisch also noted that if there’s any state that should be disqualified from running a retirement system, it’s Illinois. As of the most recent update, Illinois’ public employee pension plans had a total unfunded liability in excess of $111 billion. One of its plans has accrued liabilities that are more than six times greater than its actuarial assets.
The champion of the Secure Choice policy was state Sen. Daniel Biss, a relative newcomer who educated himself in retirement finance by throwing himself into the debate about how to fix the public employee plans. Along the way, he learned about the appalling state of retirement finance for people without a pension.
“I was stunned by how large the population of workers is that lacks access to an employer-sponsored plan,” Biss said, about 2.5 million in Illinois.
The interesting thing here is that the state could have helped more people get to a secure retirement without getting into the retirement plan business. That’s because the key provision was to make enrollment automatic, so the employee doesn’t have to do anything.
For retirement plan reformers, this is a key initiative. The U.S. Department of Labor reports that about 30 percent of eligible employees now don’t join a 401(k) or similar defined contribution plan. If enrollment were automatic, about half as many would opt out.
As Biss noted, any workers in Illinois currently without an employer-sponsored plan always have the option at any time of just opening an individual retirement account, or IRA, on their own. The IRA participation rate for those people, in Illinois anyway, is near zero.
There is a great temptation to see people who don’t get around to an IRA or much saving of any kind as personally irresponsible. It’s not hard to conclude that you have to nudge them to save, if not flat-out require them.
I’m inclined to be a little less judgmental.
The Federal Reserve, in its most recent review of American family finances, said families in the bottom half of the income distribution saw retirement plan participation decline from 48.2 percent in 2007 to 40.2 percent in 2013. The explanation for the drop in participation may be as simple as people looking at the stack of unpaid bills on the dining room table and deciding to take a break from saving for retirement.
Many people just don’t save
Earlier this month, there was yet another study on “emergency savings” among consumers. This one said just 38 percent of Americans thought they could cover a $500 car repair with money in a checking or savings account.
So it’s no surprise that the nonpartisan National Institute on Retirement Security reported in 2013 that when all households are included — not just households with retirement accounts — the median retirement savings balance is $3,000 and about $12,000 for those with one or more workers nearing retirement.
Just having a state get into the retirement-plan business isn’t going to do much to fix the retirement finance problem that leads to an average nest egg of $3,000. Nudging more people to set aside 3 percent of wages for retirement obviously helps, but aren’t there ways to achieve that without having the state compete with local companies that set up and administer plans?
What additional policy changes, state and federal, are needed to help middle-class working families build some sort of financial security for retirement when they already see themselves as financially under the gun? And what’s the proper role of state government in any system that will enable that to happen?
Those are questions that might actually take a pretty astute consultant to help answer.