America’s retirement crisis has been exacerbated in no small part by the erosion of the country’s savings culture. It’s well known that many of today’s workers are failing to save enough to continue their lifestyles in retirement or are failing to save at all.
It hasn’t helped that four in 10 workers lack access to an employer-sponsored retirement plan and half of all workers do not participate in one, according to a 2016 report by the Pew Charitable Trusts.1 The lack of access has been an impetus for several states, including California, Connecticut and Illinois, to introduce or enact legislation mandating that employers meeting certain criteria offer retirement plans or otherwise enable workers to enroll in a state-sponsored plan when implemented. Other states, like New York and Massachusetts, are debating the issue in what could be the start of an accelerating trend.
It’s been a cause for concern among some financial advisors who service and support retirement plans. Advisors have expressed reservations about the state programs, viewing them as a competitor to private sector solutions. In reality, it’s just the opposite. The focus on retirement savings in many states has raised awareness of the need to save, and the potential limitations and relatively bare-bones service support that may be offered by state retirement plans underscore the value of a well-conceived 401(k) or other employer-sponsored defined contribution plan.
It’s not to say that state retirement plans don’t have their place. Anything we can do to encourage American workers to save for retirement is beneficial and the efforts towards helping those who don’t have immediate access to a 401(k) are a well-placed sentiment. However, any business owner who is serious about preparing for retirement or helping employees prepare for retirement should consider the pros and cons of a 401(k) as compared to a state-sponsored retirement plan.
In many respects, it’s an unfair contest, like pitting Muhammad Ali in his championship days against a local club fighter with cauliflower ears and a misshapen nose. You’d better have smelling salts on hand.
Contributions Comparison
Often, what motivates the owners of smaller firms to initially offer a retirement plan to employees – sans a state mandate — is self-interest. First and foremost, the owner realizes the need to save for his or her own retirement, the more the better. That means the contribution limits for different retirement savings vehicles typically play a large part in the decision.
Compared to currently available state programs, 401(k)s generally provide higher limits for both employee and employer contributions. Most if not all state-mandated retirement plans have been established as Roth IRA accounts, meaning that participants contribute after-tax dollars that grow tax-deferred and can then be withdrawn tax-free after age 59-1/2.
The annual contribution limit for a Roth IRAs is $5,500 plus another $1,000 if the contributor is age 50 or older. Now compare that to the 2016 contribution limits for 401(k) plans, which is $18,000 for employees plus another $6,000 for those age 50 and older. When employer contributions and matches are figured into the equation, the total annual limit can be as high as $53,000, or $59,000 for those eligible to take advantage of certain catch-up provisions.
There really is no comparison. While an IRA can serve as an important savings vehicle for a low-wage worker, the contribution limits can make it very difficult for most of Middle America to accumulate enough savings to retire comfortably. It can be especially so for a business owner earning an income well-above a six figures.
New Regulations
While California, Connecticut and Illinois have all enacted their own versions of state retirement plans, none have accepted a single dollar of retirement savings. That’s because the states have yet to create any of the recordkeeping mechanisms required to operate a retirement savings plan.
In August, the U.S. Department of Labor finalized regulations intended to assist states with their implementation of state-sponsored retirement plans. There are still some potential uncertainties regarding how state-sponsored retirement plans will be administered.
The U.S. Department of Labor is responsible for administering and enforcing the fiduciary, reporting and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The goal of Title I of ERISA has been, through its 40-plus- year history, to protect the interests of participants and their beneficiaries in employee benefit plans.
Ultimately, it’s unclear how the courts may rule on any components of the state programs and whether such components are governed by ERISA in spite of the Department of Labor guidance.
Retirement Readiness
For many years, employers measured the relative success of their 401(k) plans by the number of employees who actually participated. While participation remains an important goal, the real litmus test of any well-designed 401(k) is retirement-readiness.
A growing number of employers want to know if their employees are saving enough to continue their lifestyles in retirement at age 65. Advisors and retirement plan providers continue to introduce and enhance tools to help answer just that question.
Many providers can help employers ascertain what percentage of employees is on target to retire and can offer support and assistance for those that are falling short. Advisors and providers have devised educational programs focusing on the importance of preparing for retirement, how much employees need to save based on their retirement goals and individual circumstances, how to invest and allocate their retirement assets, and other retirement planning topics.
The most robust educational programs can assist employees through a variety of mediums, including one-on- one sessions, group meetings, digital tools and information, tablets and mobile devices, videos, games and others. Experience tells us that employees need to be constantly motivated to take action and different people are motivated by different messaging as well as mediums. Many providers partner with plan sponsors on regular communications campaigns to promote the need for retirement savings with the goal of increasing participation and savings.
And the state programs? It’s unclear. While there has been a fair amount of publicity about the creation of state programs, it remains to be seen how robust and comprehensive state educational, enrollment or investment support programs will be for state-sponsored retirement savings programs.
Retirement Confidence
There is no doubt that Americans need help in saving for retirement and most recognize they face challenges doing so. After all, the Employee Benefits Research Institute reports that the percentage of workers who are very confident about having enough money for a comfortable retirement was 21 percent in 2016. 3 And that’s an increase from record lows in 2013.
While state-mandated plans may be appropriate for some, there is no doubt that today’s 401(k) plans and the support that accompanies them is a highly effective strategy for preparing workers to retire on their own terms. Making 401(k)s more widely available and educating workers about their benefits would be a big step in boosting Americans’ retirement confidence.
E. Thomas Foster Jr. is Assistant Vice President of Strategic Relationships for Massachusetts Mutual Life Insurance Company (MassMutual).
1 Who’s In, Who’s Out, A look at access to employer-based retirement plans and participation in the states, the Pew Charitable Trusts, January 2016, p. 1,http://www.pewtrusts.org/~/media/assets/2016/01/retirement_savings_report_jan16.pdf
2 Investment Company Institute, 401(k) Plan Assets, March 31, 2016, https://www.ici.org/research/stats/retirement/ret_16_q1
3 The 2016 Retirement Confidence Survey, the Employee Benefit Research Institute, https://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3328
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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