In a study of Form 5500 data, researchers at Pew confirmed their prior survey results: new state-mandated Roth IRAs would prompt some employers to add a retirement plan without prompting others to terminate their existing plan.[i]
Surprise, Surprise, Surprise! Employer-sponsored, tax-qualified plans like the 401(k) are superior to state-mandated Roth IRAs[ii]. This is news to Pew researchers?
Is that news to you? It should not be because the state-mandated IRAs are suboptimal—they are a poor substitute for IRAs that have been available in the individual marketplace, let alone a 401k plan.[iii]
Keep in mind that every worker who does not have access to an employer-sponsored plan could contribute to an IRA—for 49 years (1975 through 2023)! All workers, including those eligible for an employer-sponsored plan, could contribute to an IRA since 1982—42 years (1982-2023). Finally, a super majority could contribute to a Roth IRA for the past 26 years (1998-2023).[iv] No surprise, most do not.[v]
A recent Wall Street Journal article states that: “… 56.5 million Americans, or about 48% of the private-sector workforce (did not have) access to a workplace retirement savings plan.”[vi] Well, the new state IRAs did not increase access or coverage. No one became eligible to contribute to an IRA because the state offered a product. In fact, 96+% of American workers are paid electronically where almost all such payroll systems allow for splitting the net paycheck.[vii] So, almost all workers could have contributed to an IRA each payday.
So, obviously, a 401(k), “done right” is superior to an IRA—higher deferral limits, higher catch-up limits, most offer both pre-tax and Roth contributions, tax-favored liquidity without leakage via loans, and even an employer contribution. And, obviously, IRAs that have been available in the individual marketplace since 1982 are superior to state-mandated IRAs—pre-tax or Roth, lower fees, greater choice of investments.
If You Were an Employer, What Would You Have Done?
No one, including Pew researchers, should have been surprised. Put yourself in the position of an employer who must invest time, effort, and resources to comply with a state IRA mandate or pay a penalty or add a tax-qualified plan. Who would pay the penalty? No surprise, most simply added the state-mandated payroll deduction functionality and defaults. And, unsurprisingly, some employers were not interested in a suboptimal, state-mandated IRA product.[viii]
There is benefits precedent supporting Pew’s findings. Consider health reform.
Here is the health reform employer mandate: To avoid the “penalty tax,” an employer of 50 or more Full Time Equivalents must offer 95+% of its employees and their dependents access to “affordable,” “minimum essential coverage” of “minimum value” or pay a penalty tax. How are those defined in 2023?
Access/Coverage: Employee and dependents, an employer need not offer coverage to a spouse.
Affordable: An employer can charge an after-tax contribution of 9.12% of a worker’s income, plus, where a spouse or child is covered, the employer can add on the full cost to cover those individuals.
Minimum Essential Coverage: Certain preventive services with a U.S. Preventive Services Task Force (USPSTF) grade of A or B (with no cost sharing). And, where routine care expenses would otherwise qualify for coverage, those same expenses must be provided for individuals enrolled in a clinical trial.
Minimum Value: A plan that covers 60% of expenses. For example, in 2023, minimum value includes a plan that has a deductible and out of pocket maximum set at $9,100 (a calculated actuarial value of 59+%, which qualifies because it is within 2% of the 60% standard).
Given minimum compliance as described above, no one was surprised to see employers maintain their health coverage over the past 10+ years—especially because an employer who did not offer qualifying coverage would have to pay a penalty AND many of the previously covered workers would have to shoulder the full cost of coverage (no taxpayer subsidy).
So, again, no surprise that employers adopted 401(k) plans—given the choice of a penalty or the suboptimal state-mandated IRA. And, again, no surprise that employers continued plans already in place.
Success = A Passing Grade?
The mandates have triggered additional contributions.[ix] So, on a pass/fail basis, they do get a pass. However, using the more traditional grading system, they grade out, at best, as a D-. Without the employer mandate to auto-enroll workers, participation would likely be insufficient to justify the implementation costs—as we saw with MyRA and the early 1980s introduction of payroll-deducted IRAs.[x]
Years ago, I reviewed the performance and suboptimal results as well as the excessive cost of state-mandated IRAs. One retirement expert from a top five, Ivy League academic institution confirmed: “I agree that better plan designs could be imagined … But the perfect cannot be the enemy of what might be a good start!”
It reminds me of how people view health reform and why many give it a passing grade.
Our government elites like to confirm that the percentage of Americans without health coverage has declined from a pre-health reform high of ~16% of Americans in 2010 to an all-time low of ~8% in 2022, declining from 48.3MM to 26.4MM Americans.[xi] All true. When I started to present health reform in 2010, I would joke that the law should have been subtitled: “Reducing the number of uninsured regardless of taxpayer cost.” I wonder how much those taxpayer subsidies contributed to the $19+ Trillion increase in national debt since 2010.[xii]
SEE ALSO:
• State-Mandated IRAs Not Crowding Out Private 401(k)s: Pew Research
[i] T. Guzoto, M. Hines, A. Shelton, State Automated Retirement Savings Programs Continue to Complement Private Market Plans. Federal data for 2021 shows new state-facilitated initiatives may boost private sector plans. Pew, 4/14/23. “…in those states sponsoring automated savings programs, employers with plans continue to offer them and businesses without plans were adopting new ones at rates in line with, or even above, the national average. … (and) … All three states had plan termination rates below the rate for the nation as a whole in 2021. And the changes in states with automated savings programs appear to be in line with the overall national trend. (and) … Results from an earlier Pew survey of employers that was done as states were first considering such programs suggested that the state efforts could nudge employers toward offering such benefits: In the survey, many employers without plans stated that they would adopt their own if they were required to choose between enrolling workers in a state program or starting one.” Accessed 4/17/23 at: https://www.pewtrusts.org/en/research-and-analysis/articles/2023/04/14/state-automated-retirement-savings-programs-continue-to-complement-private-market-plans
[ii] Author’s Note: Only workers with modified adjusted gross incomes of < $129,000 (single filer) can make a full Roth IRA contribution in 2023 (< $204,000 if married filing jointly). A 401k plan typically does not limit eligibility based on compensation.
[iii] J. Towarnicky, Retirement Savings Crisis: Access Isn’t the Issue, Prioritization is, 2/26/21, Accessed 4/17/23 at: https://401kspecialistmag.com/retirement-savings-crisis-access-isnt-the-issue-prioritization-is/ See also: J. Towarnicky, State-Run IRAs Are Similar, and Suboptimal: Opinion. Payroll deduction is so 20th Century, 6/29/22, Accessed 4/17/23 at: https://401kspecialistmag.com/calsavers-is-similar-to-oregonsaves-and-suboptimal-opinion/ See also: J. Towarnicky, Maryland’s State-Run IRA Is Different, Better, and Still Less Than Optimal. At this point, ALL Maryland workers would be better served by saving in a superior alternative. 9/16/22, Accessed 4/17/23 at: https://401kspecialistmag.com/marylands-state-run-ira-is-different-better-and-still-less-than-optimal/
[iv] J. Towarnicky, Roth Celebrates Its 20th Anniversary, How Did We Get Here? Where Are We Now? 2/26/18, Accessed 4/17/23 at: https://www.psca.org/news/blog/roth-celebrates-its-20th-anniversary
[v] Investment Company Institute, The Role of IRAs in US Households’ Saving for Retirement, 2020, January 2021. “…Although most US households were eligible to make IRA contributions, few did so. Only 12 percent of US households contributed to traditional or Roth IRAs in tax year 2019…” Accessed 4/17/23 at: https://www.ici.org/doc-server/pdf%3Aper27-01.pdf
[vi] A. Tergesen, Millions Gain Access to 401(k)s as More Small Businesses Launch Plans. State mandates and the hot job market prompted the big increase in new retirement plans, 4/14/23, Accessed 4/17/23 at: https://www.wsj.com/articles/millions-gain-access-to-401-k-s-as-more-small-businesses-launch-plans-7584a9b7?page=1
[vii] American Payroll Association, Getting paid in America Survey, 2022, Accessed 4/17/23 at: https://info.americanpayroll.org/pdfs/npw/2022_Getting_Paid_In_America_survey_results.pdf
[viii] J. Towarnicky, note iii, supra.
[ix] J. Towarnicky, note iii, supra.
[x] J. Towarnicky, State Mandated, Payroll-Deducted IRAs 20X, 15X, 12X More Likely to Save? Not Really! 12/27/22. “Without those value-added features commonplace in today’s 401k plans, actual experience with payroll-deducted IRAs shows that simple “access to a way to save at work,” with voluntary enrollment and without the automatic enrollment and escalation mandates, would be much more likely to match my experience in 1982 and the federal government’s experience with MyRA less than a decade ago—where almost no one enrolled.” Accessed 4/17/23 at: https://401kspecialistmag.com/state-mandated-payroll-deducted-iras/
[xi] A. Lee, J. Ruhter, C. Peters, N. DeLew, B. Sommers, National Uninsured Rate Reaches All-Time Low in Early 2022 The uninsured rate in early 2022 has reached an all-time low of 8.0% among all U.S. residents. Department of Health and Human Services, 8/23/22, Accessed 4/17/23 at: https://aspe.hhs.gov/sites/default/files/documents/d4b795f54948bad96140e8c596634204/Uninsured-Q1-2022-Data-Point-HP-2022-23-08.pdf
[xii] aequum, What Role Does Health Reform Play in Annual Deficits, the National Debt and Today’s Debt Ceiling Debate? Accessed 4/17/23 at: https://aequumhealth.com/blog/what-role-does-health-reform-play-in-annual-deficits-the-national-debt-and-todays-debt-ceiling-debate/
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
