Data & Research February 25, 2016

Auto-IRAs a Better Solution to Close the Coverage Gap, Report Says

A research brief contends that a national auto-IRA program would be more efficient at closing the retirement plan access gap than state-run programs.
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The Center for State and Local Government Excellence (SLGE) notes in an issue brief that the percentage of private-sector workers offered any type of employer-sponsored plan has not increased at all since 1979, according to Census Bureau data. The percentage is hovering just below 60%.

Since no legislative action has been taken to address this coverage gap, states have taken steps to do so. And President Obama, seeing no action on his national auto-IRA program proposals, last year ordered the Department of Labor (DOL) to issue guidance to help states in their efforts.

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The first successful effort occurred in California; legislation enacted in 2012 established the California Secure Choice Retirement Savings Program. The program mandates employers to enroll participants in IRAs—avoiding employer subjection to Employee Retirement Income Security Act (ERISA) requirements—and precluded employer contributions to the program.

Since then three other states—Connecticut, Illinois, and Oregon—have also passed legislation following the auto-IRA model.  Connecticut has completed its feasibility study and will ask the legislature for approval to get the program up and running. Illinois does not have to go back to the legislature, but has not yet completed a feasibility study. Oregon started a little later, but is aiming at completing its study by the fall of 2016 and having its program up and running by 2017.

NEXT: Different approaches not the best solution

The researchers postulate that these states are taking the lead because states that require the most from taxpayers, either because their public plans are particularly generous or severely underfunded, would be the most likely to press for a retirement system that ensures adequate retirement income. Another possible explanation is that the economics of the state are driving the initiatives. That is, those states with more workers who may be unprepared for retirement are the ones leading the effort. The researchers cite data that somewhat supports this notion.

Two states—Washington and New Jersey—have followed a different path. These states have adopted a marketplace approach, which does not involve an employer mandate to automatically enroll uncovered workers, but rather provides employers with education about plan availability and makes pre-screened plans available through a central website to promote participation in low-cost, low-burden retirement plans. “Our bias is that simply providing information through a marketplace instead of requiring employers without a plan to automatically enroll their employees in a state-initiated plan will have only a modest effect. A mandate coupled with auto-enrollment is the key to success,” the researchers write. 

Other states, such as Massachusetts, are toying with the idea of having both an auto-IRA system and a state-run system of multiple employer plans (MEPs).

Noting the differences in approaches by the states, the researchers say that even if more states are successful in setting up a tier of retirement income for their citizens, this “is clearly a second-best alternative.” They conclude that a national auto-IRA plan would be a much more efficient way to close the coverage gap, offering substantial economies of scale and avoiding the laborious, time-consuming, and expensive process of setting up 50 different state plans.

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