A new study finds that OregonSaves—launched in 2017 as the first state-sponsored retirement plan—has “meaningfully increased employee savings,” and employees opting out of the program “are often doing so for rational reasons.”
The study, funded by the U.S. Social Security Administration and conducted by the Michigan Retirement and Disability Research Center, analyzes participation choices, account balances, and inflow/outflow data between August 2018 and April 2020 for OregonSaves, which requires employers without a retirement plan to automatically enroll their workers in the state-sponsored IRA.
As the Center for Retirement Research at Boston College’s Squared Away Blog notes in an Aug. 25 post about the research, lower-income workers are much less likely to have a retirement plan, and the typical employee enrolled in OregonSaves earns only $22,600. They also tend to work in high-turnover industries like food service and healthcare where constant job changes make it difficult to save consistently. These are the types of workers who don’t usually save, and the vast majority told their employers they had not been saving prior to being enrolled in OregonSaves.
The study, “Understanding Retirement Plan Default Behavior: The Case of OregonSaves,” found younger employees and employees in larger firms have been less likely to opt out of the OregonSaves program, but participation rates fall over time.
The most common reason given (cited by nearly 30%) for opting out is, “I can’t afford to save at this time,” but the second most common (cited by 24%) is, “I have my own retirement plan.” About half of employees eligible for OregonSaves have participated in the program.
As of April 2020, 67,731 OregonSaves accounts had positive balances, holding $51.1 million in total assets. The average balance was $754, but with considerable dispersion; younger workers accumulated the fewest assets due to higher job turnover. The Squared Away Blog cites updates figures through the end of May 2022, showing the average balance in about 114,000 OregonSaves IRA accounts was $1,324 and employees have saved a total of $151 million.
“Overall, we conclude that OregonSaves has meaningfully increased employee savings by reducing search costs,” study authors John Chalmers, Olivia S. Mitchell, Jonathan Reuter, and Mingli Zhong determine, explaining that the introduction of an automatic-enrollment retirement plan increases the fraction of workers contributing to a retirement savings account by eliminating the search cost associated with learning about IRAs, opening an account at a financial institution, and figuring out how to invest it.
If search costs—which the study says may be particularly large within the sample of workers targeted by OregonSaves—are a primary reason that many workers are not already saving for retirement, the program’s use of auto-enrollment is likely to result in high participation rates at the default saving rate and significant incremental retirement savings.
That’s because studies of participant behavior in employer-provided 401k plans consistently find that younger, lower-paid, and less-educated workers are more likely to adopt default savings rates and invest through default investment options.
SEE ALSO:
• State-Run IRAs Are Similar, and Suboptimal: Opinion
• How to Address the Achilles’ Heel of State Auto-IRA Programs