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.

Data & Research February 25, 2016

Participants and Plan Sponsors Part Ways on Assessing Readiness

What plan participants know about adequate savings rates and what plan sponsors think they know are often miles apart, according to a survey released by BlackRock.
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More than half of retirement plan sponsors (59%) say the majority of their participants are saving enough to retire with the income they will need, according to BlackRock’s DC Pulse Survey. But only 28% of the participants surveyed are confident they are saving enough.

When it comes to the information plan participants need, nearly two-thirds of plan sponsors (64%) describe their participants as “very” or “extremely” informed about how much money they should be saving today for retirement, but only 37% of employees describe themselves the same way.

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Another big divide appears on the topic of retirement income, with 58% of plan sponsors saying their workers are either “very” or “extremely” informed about how to generate income from their retirement savings. Just under one-third of employees (31%) say they are.

Despite this apparent disconnect, plan sponsors appear well aware of the challenges participants face. Nearly half of plan sponsors (49%) agree with the statement, “My organization is facing an impending ‘retirement crisis’ where participants will keep working because they are unable to afford to retire.”

“Employers generally recognize that employees are under-prepared for retirement, but in some ways the problem runs far deeper than they realize,” says Anne Ackerley, head of BlackRock’s US and Canada defined contribution group.

Workers—particularly younger ones—want more support for retirement planning. Slightly more than half of workers (55%) say that their employer should provide more help. The younger the cohort, the louder the call for help: 63% of Millennials think their employer should be doing more to help them prepare for retirement, versus just 47% of Baby Boomers.

NEXT: A call for information about income in retirement.

Better retirement income solutions are one area where plan sponsors might provide more help, according to the survey. Although just 38% of workers have heard of products that give a consistent stream of income in retirement, 88% said they would be interested in considering such a product (40% would be “very” or “extremely” interested). Among plan sponsors, 69% agree that there is a growing need for DC plans to provide retirement income solutions and services—however, just 51% say they currently do so.

At the same time, 65% of plan sponsors agree that participants would value more company help, and many are taking steps to make good savings practices automatic. In the past 12 months, about one in four plan sponsors have introduced auto-enrollment, auto-escalation and/or company matching into their DC plan. Plan sponsors also are focusing on their older participants: 60% say they would like to find ways to encourage participants to stay in the plan after they retire.

In general, workers in DC plans have a positive view of their retirement investing. Nearly 70% of workers chose the words “confident,” “optimistic,” “hopeful,” “certain,” or “comfortable” when describing how they feel about the investing they do through their DC plan. But nearly half don’t agree that they are “on track” to retire with the lifestyle they want.

The BlackRock DC Pulse Survey bases results on 200 large and mega DC plan sponsors and 1,003 plan participants in the U.S. fielded online by Market Strategies International, an independent research company. Plan sponsors have at least $300 million in assets, with nearly half of the respondents serving in benefits or human resources roles, and the rest in finance, investment or business management. The 1,003 plan participants are employed full-time and were participating in their employer’s 401(k), 403(b), 457 or 401(a) plan, with at least $5,000 in assets in their current account.

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