Data & Research June 3, 2016

Familiar Challenges Could Dog State-Based DC Plans

A new report from The Pew Charitable Trusts lends some support to the arguments many providers have raised against the increasing prevalence of state-based retirement plans for the private sector. 
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At least half of state governments in the United States are exploring or implementing programs to provide retirement savings options for private-sector workers who do not have retirement plans through their employers, according to a report released by The Pew Charitable Trusts.

The report, “How States Are Working to Address the Retirement Savings Challenge: An Analysis of State-Sponsored Initiatives to Help Private Sector Workers Save,” examines efforts in 25 states and finds the vast majority of workers would participate in a workplace retirement savings plan if given a chance. However, it found potential problems state-run plans may face, some of which employer-sponsored defined contribution (DC) retirement plans also face.

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The report notes that many state proposals require that employers of a certain size enroll all workers, though these employees can opt out. While some may see state-run programs as a way for small businesses that want to offer a retirement plan to employees to avoid the administrative and fiduciary burdens of sponsoring an Employee Retirement Income Security Act (ERISA)-governed plan, Pew reports that small-business owners express concerns that mandating automatic enrollment could be an administrative burden, which could reduce the appeal of these proposals.

In addition, the report says many proposed laws seek to limit businesses’ responsibilities for implementation; however, unless a state makes a major effort to inform workers and employers about details in such cases, some targeted workers may opt out. Employers may have to engage in ongoing communications with workers about the program—and bear the economic and lost-time costs—if the state does not perform these outreach functions effectively.

NEXT: Will savings be adequate?

States using automatic enrollment in their retirement programs for private-sector employees must carefully consider where to set the initial percentage of employee pay that will go into the accounts—the default contribution rate. Because workers typically do not opt out of automatic enrollment or adjust this default rate once they are enrolled, a rate that is too low could encourage employee participation but result in little savings, forcing the state to administer a large number of small account balances. A rate that is too high could lead to higher balances but could also cause some workers to avoid taking part altogether.

This is a delicate balance employers that sponsor defined contribution (DC) retirement plans also face.

According to the Pew report, states face challenges in generating and protecting workers’ savings over the long run. Low-risk investments make losses less likely but also increase the chances that accounts won’t grow enough to meet retirees’ needs. Some states have looked at ways to guarantee certain rates of return, but that approach also brings possible risks and costs to the state.

Likewise, employers that sponsor DC plans grapple with the right investment choices to offer participants and whether to offer guaranteed income.

“Many states are considering new options for increasing retirement savings, and early indications are that it’s feasible for them to take on this challenge,” says John Scott, director of Pew’s retirement savings project. “Interested policymakers must explore ways to maximize program effectiveness, minimize administrative and financial costs for employers, and manage states’ legal and financial risks. But these priorities can conflict and require consideration of difficult trade-offs, making the task of crafting proposals tougher.”

Pew’s analysis identifies and examines the approaches that states are taking and looks at the specific choices facing policymakers, such as costs; employers’ participation, responsibilities, and liabilities; and rules for employees’ enrollment, contributions, and withdrawals. The report is here.

Data & Research June 3, 2016

Coverage Questions Loom Large Where Small Business Reigns

Areas with low DC plan access tend to be those with more small businesses, according to a new analysis from the Pew Charitable Trusts.
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More than 40% of full-time private sector workers say they still lack access to either a pension or an employer-based retirement savings plan such as a 401(k), new research from the Pew Charitable Trusts shows.

At the same time, just under half (49%) of U.S. workers say they participate in an employer-sponsored plan, highlighting the even more troubling fact that not everyone who is offered a plan chooses to take advantage. 

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These findings are based on the Pew research report, “A Look at Access to Employer-Based Retirement Plans in the Nation’s Metropolitan Areas,” which analyzes how well the retirement planning system functions across different regions of the U.S. The report suggests upwards of 51 million full-time, full-year private sector workers live in “metropolitan statistical areas” (MSAs) in the United States, “close to three-fourths of all such workers.”

Troublingly, the research finds clear statistical evidence that industries and workers that tend to have lower access rates to retirement plans at work are heavily clustered in certain metropolitan areas. At the same time, Pew researchers find retirement plan access “varies more among the nation’s metropolitan areas than across states as a whole.” For example, the access rate among workers in the metropolitan areas ranges from 71% in Grand Rapids, Michigan, to 23% in McAllen, Texas. Nationwide, Pew finds 58% of those living/working in a metropolitan statistical area have access to a plan.

Pew researchers further find metropolitan areas with low retirement plan access rates are heavily concentrated in certain large states: “Nearly three-fourths of the MSAs in the bottom 25% are in Florida, Texas, or California.”

As such, employer and worker characteristics appear to play a large part in the disparate levels of access to plans across different MSAs. Notably, “metropolitan areas with relatively low rates of access generally have more people working for small employers.” Simultaneously, many areas with higher percentages of Hispanic or low-income workers also tend to have lower access rates, Pew finds.

NEXT: Other key takeaways 

One positive finding from the report is that the “concentrated nature of these underperforming localities” means that government efforts can reach larger numbers of people through smaller numbers of efficient programs. Recognizing this situation, Pew says New York City and other local government entities are hard at work considering their own focused proposals to expand retirement plan coverage for private sector workers.

Pew researchers stress that looking at MSAs rather than at states gives a much clearer picture of the disparities present in the U.S. retirement system: “Access to workplace retirement plans varies by nearly 50% across the metropolitan areas analyzed. This range is more than double what appears when looking at the states as a whole.”

Other ways of cutting the data are also informative, Pew says. “Nationwide, in about 90% of the metropolitan areas, at least half of workers had access to a plan,” researchers explain. “Among those employed part-time throughout the year living in metropolitan areas with a population of at least 1 million, the percentage of workers with access to a retirement plan ranged from 19% to 48%.”

According to Pew, metropolitan areas with higher shares of workers at small employers generally have lower access rates. “Previous analyses suggest that smaller businesses can face substantial obstacles to offering retirement plans, including general financial uncertainties and the administrative costs of setting up and running plans,” researchers note. “Across the 50 states, 22% of workers at companies with fewer than 10 employees report having access to a workplace retirement plan, compared with 74% of workers at businesses with at least 500 employees.” 

The clear result is that the metropolitan areas with the largest shares of workers at small employers are also those where access rates are generally the lowest.

The full report is online here.

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