An Effortless Way to Save for Retirement
After years of cutting public workers' retirement benefits, states are slowly adopting common private-sector practices that automatically enroll employees in savings plans and automatically increase how much people put away each month.
Between 2009 and 2013, all but two states made some change to their retirement benefit plans, most of which have been to the detriment of public employees who now need to work longer or save more to enjoy the same financial comfort in retirement as their predecessors.
To try to make up for the losses, states are slowly offering supplemental defined-contribution (DC) plans that contribute a set portion of employees' paychecks toward their retirement. To encourage employees to participate, some states require new hires to opt out of the plan (this is called automatic enrollment) and some automatically increase their contribution each year (this is called automatic escalation).
Defined-contribution plans and their accompanying automatic features are far more popular in the private sector but are gaining traction in the public sector. According to a survey of private-sector organizations by the Defined Contribution Institutional Investment Association (DCIIA), 56 percent of respondents offer automatic enrollment in their supplemental DC plans and about 25 percent have automatic escalation. Comparatively, the National Association of Government Defined Contribution Administrators (NAGDCA) found in two separate surveys that only 8 percent of supplemental DC plans in the public sector have automatic enrollment and only seven states (including Missouri, Ohio, Texas and Virginia) and one local government offer automatic escalation. Three states, though, are currently considering adding automatic escalation.
Behavioral economics research shows that employees often are not inclined to save and aren't sure how much to save or how to invest, so automatic enrollment and escalation make the decisions people have trouble making themselves.
Keith Overly is the executive director of Ohio's supplemental DC plan for state employees, which local employees can also take advantage of. He says the group worked with behavioral economists before deciding to implement automatic escalation about six years ago. (In 2013, it started a pilot program to test automatic enrollment as well). Ohio's plan (known as Ohio Deferred Compensation or Ohio 457) is offered as an option to employees in the five primary statewide retirement systems, and it currently has approximately 180,000 active and inactive participants with roughly 60% of current state employees participating, according to Overly.
"We don't believe people save enough right now for retirement," said Overly, adding that for some people (especially younger employees), retirement is "out of sight, out of mind."
According to Overly, nationwide studies show that a lot of people enroll in supplemental retirement plans but ten years later, they haven't increased their contributions even though their salary has grown.
"When you look at the power of compounding and the difference of someone enrolling and never increasing versus a $10 per pay increase every year, it makes a huge difference," he said.
Overly's group has used a variety of ways to get people to enroll in automatic escalation, but one of their most successful uses the annual statement that all plan participants receive. The statement includes a projected balance at current contribution levels and converts that to potential monthly retirement income. For those not already enrolled in automatic escalation, an enrollment form is enclosed with an additional projection of how much their retirement income would rise if they increased their investment on an annual basis. Every time these annual statements go out, about 1,100 decide to enroll, according to Overly.
Earlier this year, they updated the enrollment form so that new participants have to opt out of automatic escalation. The automatic increase is set at $10 per year, but employees can always change the amount or stop the automatic increases altogether. More than 11,000 of the 105,000 active participants with supplemental DC plans now also have automatic escalation.
According to a recent report by the Center for State and Local Government Excellence, many states have strong anti-garnishment laws that prohibit such opt-out checkboxes and instead require written consent from an employee before an automatic escalation can begin. Ohio, however, does not have strict regulations on such activities.
Outside of anti-garnishment laws, other states have shied away from using automatic escalation for a variety of reasons. Because so many employees can still receive a traditional defined-benefit plan, some states don't see the need for supplemental savings. Some worry about taking too much out of employees' paychecks, especially when many are also being asked to make additional contributions to pension or health plans.
"If you look at what's in the best interest of your employees, you'd want them to do this," said Overly. "And from an employer standpoint, what you don't want is someone to continue to work beyond when they want to retire because they may no longer be motivated. There's a benefit even to the employers to really encourage their employees to do automatic escalation."
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