No 401(k)? No Problem. States Have You Covered.
Several states are preparing to offer a retirement plan that helps private-sector workers -- and taxpayers -- save money.
Most Americans are ill-prepared for retirement. Half of private-sector workers don't have an employer-sponsored retirement plan and only a small percentage of those 57 million people have saved enough on their own to retire. But that's starting to change.
This July, Oregon will become the first state to offer a retirement plan to part- and full-time private-sector workers who don't have access to one through their employer. The program is ultimately expected to cover nearly one million workers in the state.
Six other states -- California, Connecticut, Illinois, Maryland, New Jersey and Washington -- are also planning to roll out similar programs within the next five years. When that happens, the seven states will cover nearly one-quarter of the nation's private-sector workers without an employer-sponsored retirement plan.
Called Secure Choice, these programs have been catching on since California in 2012 decided to study the feasibility of creating one. They aren't pensions but instead independently managed and pooled retirement accounts. The programs pay for themselves through fees, so states aren't liable for the cost. In addition to the seven states that have approved a program, at least eight other states -- including populous New York -- have or are considering legislation to launch their own.
Experts have long warned that states will end up paying for a poor retiree's social services needs unless something changes. That's helped fuel bipartisan support in an era of constrained state finances. "We've heard back from conservative bill sponsors in state such as Arkansas and Utah, and they are saying, 'This is an approach where we can save taxpayer dollars,'" said Sarah Gill, senior legislative representative for AARP. "This is about personal responsibility and helping people be independent as they age -- this is not a red or blue state issue."
A recent study put actual dollar figures to those potential savings. Segal Consulting found that 15 states could save more than $100 million each in Medicaid payments in the first 10 years after a retirement savings plan is introduced. Their total projected savings would approach $5 billion. Among the eight states that are implementing retirement programs, Segal estimates their combined savings could total nearly $1.5 billion.
There have been two approaches to crafting Secure Choice programs. New Jersey and Washington state will open small business retirement marketplaces, where employers can shop for a retirement plan that fits their business model. But the more common approach is to offer 401(k)-style retirement plans directly to employees through a payroll deduction.
A common feature of both styles is to automatically enroll employees into a retirement plan, which studies have shown make it much more likely people will save for retirement. Nevertheless, employees can opt out if they choose.
Still, each state's plan has its own unique components. To get more employers to offer retirement plans, Maryland is waiving the annual business license fee for businesses that already offer one and for businesses that eventually will through the state.
AARP's Gill expects the momentum for Secure Choice to continue -- if not speed up. Those interested "are very different states, so that covers a lot of ground nationally," she said. "Now what we're seeing is the length of time it takes for states to pass bills is getting shorter."