State Mandates: How Employers Are Responding

The club of states adopting retirement plans that provide coverage for private-sector employees whose employers do not is becoming increasingly less exclusive. A recent study takes a look at how employers are responding. 

In the National Bureau of Economic Research (NBER) paper “How Do Firms Respond to State Retirement Plan Mandates?” Adam Bloomfield, a Senior Economic Policy Advisor at the Federal Deposit Insurance Corporation (FDIC),  Kyung Min Lee, an economist at the World Bank, Jay Philbrick, a student at Brown University, and Sita Slavov, a research associate at George Mason University, examine the effect of state retirement plan mandates on employer-provided retirement plans.

The researchers used data from the Current Population Survey (CPS) and Form 5500 filings to examine the effect of those programs on employer decisions regarding offering, and worker inclusion in, employer-provided plans. 

Setting the Table

Employer-provided retirement plans are the largest source of private retirement saving, the researchers write, and an increasing number of them have adopted automatic enrollment. But there still are employers that do not offer plans, and a growing number of states are stepping in and crafting plans to provide coverage to employees whose employers do not.

Such state programs require employers to either (1) offer a retirement plan they themselves sponsor or (2) facilitate automatic payroll deductions that are deposited into accounts, usually IRAs, that the state program establishes for employees whose employers do not have a plan. These plans (with one exception, Hawaii) automatically enroll the employees of employers that participate. The researchers cite previous studies in which researchers found that while they may opt out, employees who have been automatically enrolled in a plan often do not do so. 

The Findings

Bloomfield, Lee, Philbrick and Slavov’s findings include the following.

Employers are more likely to offer a plan. If a state puts a safety-net retirement plan in place, the paper says, the likelihood increases that an employer will offer a retirement plan by approximately 3%.

Employee participation. The researchers say that the presence of a state plan boosts the chances that an individual employee will participate in an employer-provided retirement plan by about 7%. Further, they say that the number of participants in an employer-provided plan increases by 3%-5%.

Changed mindsets. The paper suggests that state adoption of a retirement coverage program can change business norms and the salience of retirement benefits. Consequently, they say, some employers then begin to offer a retirement plan.

Little change among employers with plans. The researchers argue that employers that “are fully rational” likely will continue to offer a retirement plan of their own, even when the state government begins to make a program available. However, there may be some employers that may not have such a reaction and will drop their plan in response. This, they say, would in effect cut employees’ compensation by the value of the retirement benefit it had been offering. 

Some employers still may drop a plan. It is possible, the paper says, that some employers may drop their plans if the state puts one in place, because a plan is expensive to administer and is subject to regulations, including nondiscrimination tests.  

While no longer offering a plan if a state puts a program in place may seem to mean fewer burdens for an employer, the researchers point out that even if they participate in a state program, employers could be mistaken in that assumption—there still will be administrative costs for them even if they are participating in a state program. 

The Bottom Line

The researchers estimate that a state putting a program in place will increase the odds that an employer will offer a retirement plan and that employees will participate in it.