According to the latest data from the National Institute on Retirement Security, more than 59% of working-age people living in America have no money in their retirement account—whether it be an employer-sponsored 401(k) or an IRA—and are not supported by any defined-benefit pension plans. Americans who have retirement money in their account have balances smaller than their annual income. The average number of working Americans won’t be able to maintain their present-day standard of living in retirement.
If you are amongst those and sailing in the same boat, don’t worry. Several state governments are working to solve your problem. Ten states have passed legislation, and created programs to enroll more people in retirement plans, and a majority of states are now following this program.
Colorado became the latest state to come up with this plan in June. According to the latest statistics from the Colorado Secure Savings Plan Board, 40% of private-sector workers in Colorado have no employer-sponsored retirement plan.
Colorado State Treasurer, Dave Young, said that they performed four studies to check the different types of plans followed by other states. Their research realized the price they’d had to pay if they nothing. People with no retirement money start taking their Social Security benefits when they become eligible, which means they tend to depend on other government services for low-income individuals.
Let’s understand these plans.
There are three basic state plans—an auto-IRA, a marketplace, and a multiemployer plan.
Colorado State supports an auto-IRA plan. Under this plan, employers enroll their employees and set up automatic payroll deductions. Employers must offer a project—either IRA administered by a state or some other procedure of their own. Employees have an option to opt-out of the plan, but they have to make that choice unconditionally. Records show that most employees prefer sticking to the program.
Employees contributing to IRA plans generally find it challenging to match employer contributions, and payroll deductions are made based on the after-tax limits to federally mandated limits. Most employees choose a Roth IRA. In 2020, the contribution limits are $6,000 a year for a Roth IRA for people aged 50 and below, and $7,000 for anyone older than 50. During retirement, employees can withdraw money tax-free provided the account holder is older than 59½ and has maintained the account for at least five years. Individuals can withdraw early but have to pay some early withdrawal penalty and tax.
David John, deputy director of the Retirement Security Project at the Brookings Institution, was the one who designed an auto-IRA framework for states. According to him, this program works well because most of the employers and employees are familiar with an IRA, and it is easy for states to search asset managers with plenty of investment options.
He also added that the idea behind this program was to make things as easy as possible for employees.
Some states, including Washington and New Mexico, support a retirement marketplace plan. Users get an option to choose from several plans in the marketplace and create their retirement accounts with the help of private-sector providers. The market plan’s contribution and tax rules vary, depending on the option chosen by the employee. Participation in this plan is not compulsory.
Other states, including Massachusetts and Vermont, are supporting a multiemployer plan for businesses. This plan is usually a 401(k) plan. For small businesses, the program offering a stand-alone 401(k) or IRA may be expensive, so grouping with other companies can reduce the cost of the plan because the fees reduce when there are more participants. Under this plan, contribution and tax rules vary depending on the option chosen by the employer group.
States offering financial wellness support
California, Illinois, and Oregon are the first three states who started offering auto-IRA plans, and the latest data proves that they are working as intended. Oregon, the state with the longest-running program, has more than 70,000 participants, contributing an average of $142 a month, or about 5% per paycheck. That’s a good increase from an average of $106 a month in 2018 and about 22,000 participants at the end of the same year.
States have started registering employers for mandated retirement plans in phases, and some of these phases have been stretched due to the ongoing pandemic.
Michael Parker, executive director of the Oregon Savings Network, responsible for overseeing the OregonSaves IRA, has stated that the number of people with retirement plans has increased, and contributions have remained consistent during the coronavirus pandemic. He further added that this program has started considering ways of adding emergency-savings to these accounts as an option so that they can get some financial support in case they lose their jobs or see a significant financial crisis. Oregon keeps the first $1,000 of contributions to retirement plans for account holders to help them withdraw money when they need it. These withdrawals went up slightly when pandemic-related lockdowns clobbered the economy in March, he added.
Oregon and other states are working on this problem and studying ways to help employees save their money when they retire. Mr. Parker said that this is an area where the rules need to focus on because it is not easy to manage lifetime income in retirement.
Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University, acting as a clearinghouse for information on state-backed plans, stated that the pandemic has awakened people and made them realize the importance of retirement savings.
Antonelli said that if they see any savings in people’s accounts, it’s only retirement savings. So creating plans for people with no retirement plan is very important. “But we also need other things that states are looking at, like emergency accounts. Right now, states are seeing just how financially fragile most people are. That’s the challenge we face.”