Slowly but surely, states are adopting programs to provide retirement plan coverage to people whose employers do not. The plans that are in place are growing in participation and assets, but what does an industry insider think?
To provide an idea of what a private-sector retirement plan service provider thinks of state-run retirement plans, Chad Parks, Founder and CEO of Ubiquity Retirement + Savings, a service provider that has worked with more than 100,000 employees, offers his perspective on those plans and their impact on individuals’ retirement planning and small businesses in the retirement industry.
“First and foremost, the fact that 20+ states have or are contemplating retirement readiness within their borders to raise awareness about the looming retirement crisis is a huge step in the right direction,” says Parks. And, he suggested, they have a variety of impacts beyond simply making sure that workers have at least some retirement income.
Disincentive for the Private-Sector?
Even before the first plan began operation, “when states were just dipping their toes into state-mandated solutions” as Parks puts it, he says that most incumbent large providers opposed the idea.
Would the enactment of a state-run plan cause an employer that was offering a plan to stop doing so? Parks admits that “there are some areas of concern,” but says that he also does not state-run programs will encourage private-sector employers that are offering retirement plans to cease doing so. That, he says, is because “There is flexibility and choice available in the state programs, but they are designed to be a basic option, which is not necessarily the best thing for all small business models. We don’t see people dropping their customized, intricate plans for the basic offering.”
Nor does Parks think that state-run plans create a disincentive for private-sector employers offering a plan. “While there have been conversations about whether state-run plans would overtake other types of plans, I do not anticipate that happening,” he says. In fact, he argues the converse: not only do state-run plans provide more options, their existence raises awareness and “shows which companies are willing and able to step up and do their part to end the retirement savings crisis.”
Further, says Parks, “State-mandated programs spur demand, as they offer a solution that’s good for some businesses but not the perfect solution to fit all companies’ needs.” He continues, “The majority of programs have gone the route of a Roth IRA, which is payroll deducted after tax. This is low-cost for the employer but higher cost to the employees. Private-sector plans, he says, offer “greater flexibility in plans through more affordable options.”
An Early Assessment
So far, state-run retirement plans are operating in Oregon, California and Illinois and are under construction in more states in diverse regions of the United States. Of the ones currently functioning, Parks says, “The early programs are trying not to be too aggressive. They look at the average earnings of individuals in that area (say $40,000) and take a 3% payroll deduction from that ($1,200) divided by the 12 months in a year ($100 a month) for about 30 years, bringing them to around $36,000. With market growth in the equation, an individual may have approximately $50-60,000 in their personal retirement savings when the time comes to retire.”
That figure may seem small when viewed against the lens of a decades-long retirement, but Parks says, “What I’ve learned is the money saved along the way makes all the difference. Most people collect Social Security, and maybe a pension, but these savings need to be supplemented by the nest egg accumulated in order to have enough money to last throughout retirement. If an individual starts with a 5% payroll deduction and an automatic increase each year, slowly they start to save more and find themselves with a bigger balance at the end of their career without even realizing it.”
Federal Involvement
“The federal government is trying to steer policy to get more people in the retirement savings system,” says Parks, citing the SECURE Act and SECURE Act 2.0, which takes it “a step further with an increased tax credit from 50% to 100% in hopes that more small businesses will be able to participate.”
And if the federal government put in place a mandate that employers must offer a retirement plan to their employees? Such a mandate, Parks says, “would order businesses with a certain threshold of employees for a specified number of years to offer, at least, an IRA with the goal of getting everyone saving for retirement.”
Parks conceives of a federal mandate as not being another program, but rather a mechanism that instead would track businesses to ensure they’re offering some sort of retirement savings vehicle through either the private-sector or a state-run program. He does not envision such a mandate as replacing or overseeing state-run programs; he sees such a thing as filling in gaps and complementing state plans. “Ultimately, this would get a lot more companies to take retirement saving seriously and provide more solutions to their employees,” Parks argues.
The Bigger Picture
State-run retirement plans have effects beyond their stated goal of providing at least some retirement income to individuals, Parks suggests.
“State-mandated programs are forcing the industry as a whole to ask itself how to become part of the solution,” he observes. “This development is forcing the incumbent large providers to figure out how to serve a larger audience (encompassing both large and small businesses) in a cost-effective manner with the same technology and oversight made originally only for the larger plans. These are the solutions coming to complement a state-run program that will benefit everyone.”
Parks indicated that while state-run retirement plans may not be a panacea, still they have positive effects and impacts. “While these programs will not single-handedly be able to solve the retirement readiness problem, they are encouraging solutions being developed in the retirement marketplace and motivating the private sector to come up with its own solutions,” he says. “In the end, it will get more individuals into the retirement savings system which is a major policy objective of the states enacting these plans,” Parks asserts.
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