When some states started mandating that companies offer retirement plans or be required to auto-enroll employees into state-sponsored IRA programs, there was plenty of concern that it would prompt some companies to terminate existing 401(k) plans and go the state route.
To date, that hasn’t been the case. A report released today from the Pew Charitable Trusts, building on research from a Dec. 21, 2022 Pew report, finds that instead of enrolling their employees into mandated state options, many companies are choosing instead to start their own 401(k) plan.
Citing federal data for 2021, the Pew report shows that implementation of state-facilitated retirement savings plans for private sector workers without workplace plans is actually having a positive impact on the creation and retention of private plans.
The report says businesses in California, Illinois, and Oregon—three of the first states to launch state-mandated plans—continued to create new private 401(k) plans in 2021 at rates similar to or exceeding those in states without such programs.
It seems the private retirement plan market has in fact treated the introduction of state mandates as an opportunity to spur new business.
“… this might very well be the best time ever to be a provider of new 401k plans.”
J.D. Carlson, Plan Design Consultants
In 2021, the Pew report found California still had a higher rate of retirement plan creation than the national average, and the state’s share of new plans remained among the highest in the country. California experienced a 16% increase in new 401(k) plans from 2019 through 2021, compared to 2013 to 2018. The state officially started its CalSavers Retirement Savings program in 2019.
“At Plan Design Consultants we have been in the startup game for over 40 years, but this might very well be the best time ever to be a provider of new 401k plans,” said company CEO-President J.D. Carlson, also of Retireholics fame.
A Wall Street Journal article posted today on the subject noted that Carlsbad, Calif.-based Plan Design Consultants said its sales of first-time plans in California rose 60% in 2021 and 35% in 2022.
“When you look at the growth we had in terms of new startup plans in 2021 and 2022, you can’t deny the impact of CalSavers as that played a big role, but our marketing efforts and the hard work of our sales team can’t be overlooked either,” Carlson told 401(k) Specialist.
“2023 is off to another phenomenal start for us, so the momentum is still very strong. Even with new California mandates for employers with 1-4 employees, I think the SECURE 2.0 tax credits will be a bigger influence and will spark growth in our new plan installs nationally.”
Oregon started enrolling private sector employees in OregonSaves—the first state-run plan in the nation—6 years ago. Research shows Oregon saw an increase in the share of new plans increase from 6.7% on average between 2013 and 2016 to 8.5% on average in the years after OregonSaves started operations in 2017.
In Illinois, Pew found the average share of new plans increased from 5.3% between 2013 and 2017 to 6.2% after Illinois Secure Choice started enrolling savers in 2018 through 2021.
The creation of new 401(k) plans has been aided by tax credits Congress authorized and expanded through the SECURE Act in 2019 and SECURE 2.0 in 2022 that incentivize companies by lowering the cost to start a 401(k) plan.
The WSJ article also points out that for workers, one of the main benefits of a 401(k) is that it allows those under 50 to save up to $22,500 a year, compared to only $6,500 for Roth IRAs, the vehicle most state programs use. The limits for those 50 and older rise to $30,000 and $7,500.
Interestingly, the WSJ piece also quotes CalSavers Executive Director, Katie Selenski, saying she welcomes the state’s trend of higher adoption of 401(k) plans, even though it reduces participation in CalSavers, which has $483 million in assets.
“State mandates are providing an opportunity for private plan providers to present the case for their products and that is a good thing,” she said.
The American Retirement Association also took note of the WSJ piece today, saying via LinkedIn:
“Great news that more small businesses are offering retirement savings plans to their employees, and it’s encouraging to see the impact this is having on millions of workers who previously lacked access to such benefits.”
ARA CEO Brian Graff added on LinkedIn, “We Can Do This! And we don’t need the Federal Government to create an unfairly competing subsidized 401(k)-style retirement plan to interfere with the progress.”
Graff recently warned NAPA 401(k) Summit attendees of what ARA sees as a looming threat to the private retirement plan market posed by the pending reintroduction of bipartisan legislation seeking to create a federally run retirement plan for low- to moderate-income Americans lacking coverage based on the model of the federal government’s Thrift Savings Plan.
That legislation—“The Retirement Savings for Americans Act”—is expected to be reintroduced in Congress in the coming weeks. A federal plan if enacted would be expected to negatively impact participation in existing state-run programs. There are currently 11 states that have established privately managed auto-IRA programs.
SEE ALSO:
• State IRA Programs Boost Private 401(k) Plan Adoption
• OregonSaves has ‘Meaningfully Increased Employee Savings’
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
