State and Local Initiatives to Expand Retirement Savings Presentation Council of State Governments/Eastern Regional Conference Geoffrey Sanzenbacher Center for Retirement Research at Boston College August 2017

The problem: only half of private sector workers have coverage at any given point. Percentage of Private Sector Workers Ages 25-64 Offered an Employer-Sponsored Retirement Plan, 1979-2014 Source: U.S. Census Bureau, Current Population Survey Annual Social and Economic Supplement, 1980-2015.

State Retirement Security Activity, as of August 2016 But Congress has not passed any legislation, so states like Connecticut have stepped into breach. State Retirement Security Activity, as of August 2016 Failed legislative initiative No activity Active legislative initiative Auto-IRA enacted Marketplace enacted Source: Authors’ analysis.

The “Auto-IRA” is a promising approach for expanding coverage. States will require employers not offering a qualified plan to enroll workers in an IRA. States have typically decided on a “Roth” structure to avoid penalties on withdrawals. Initially, states considered a MEP, but such an approach would have to be voluntary for employers. Workers contributions will be deducted automatically from their paychecks, but workers can opt-out at any time.

Today, the various auto-IRA states are in different positions regarding their programs. Connecticut has conducted market and feasibility analyses and is creating an implementation board. Oregon is live with a pilot program, using Ascensus as its recordkeeper and State Street as its investment manager. Illinois has chosen Ascensus as its recordkeeper. California is preparing to issue an RFP for service providers. Maryland has passed legislation and established a board.

An understanding of the market is a crucial first step for states considering auto-IRAs. Key questions include: How many workers will participate in the program and is participation responsive to the default rate? What challenges are unique to this population? What is employers’ capacity to implement the program and will they support it? For Connecticut and Oregon, CRR addressed many of these questions and the results are illustrative.

Connecticut estimated participation using an “enrollment experiment.” Uncovered workers were given a description of a likely program and then asked whether they wanted to opt out. Instead of asking about preferences over different features, study presented each worker a single program design. For example, a 3-percent default contribution rate versus a 6-percent contribution rate. If more workers opt out more under one feature than another, that feature would be seen as driving the difference.

Some workers saw the “base case” program design, with a 6 percent contribution rate.

Other workers saw the same program with a 3-percent default contribution rate.

While other workers saw the program with auto-escalation.

Opt-out Rates Under Various Contribution Rate Options The results show high participation can be maintained with a rate of 6 or 3 percent. Opt-out Rates Under Various Contribution Rate Options Note: Solid red bar significantly different from base case at 5-percent level; dotted bar at 10-percent level. Source: Authors’ calculation from survey of uncovered workers (conducted by Knowledge Networks).

Connecticut and Oregon market research illustrates the challenges of this population. Uncovered workers are younger, less educated, and more likely to be minority than covered workers. Many workers without retirement plans are new to saving, so need to be approached differently than workers with plans. The affected population is more mobile than average, which creates administrative and financial burdens.

Unemployment Insurance Filing Method of Affected Oregon Firms, 2015 On the employer side, one challenge is that many without plans manage own payroll. Unemployment Insurance Filing Method of Affected Oregon Firms, 2015 Sources: Oregon Employment Division, 2015 and Current Population Survey March Supplement 2015 (representing calendar year 2014).

But, while some employers oppose plan, this does not translate to encouraging opt-out. Share of Non-Plan Firms Discouraging/Encouraging Opt-Out Support for Program from Non-Plan Firms Note: Excludes nine respondents who answered “don’t know” or “refuse.” Source: Nielsen Phone Survey of Connecticut Employers.

States must answer several questions before implementing their programs. How can states keep costs low for employees and employers? How can states help the programs become financially self-sufficient without burdening taxpayers?

Keeping costs low can be challenging due to administrative hurdles. The programs currently do not have information on employees and employers. These data must be collected and validated. IRA systems are not integrated with payroll systems, and connecting small employers can be costly (to program and employers). Technology has potential to reduce costs, but comes with risk.

Start-up costs must also be financed without burdening taxpayers. Start-up costs include: The cost of establishing the program (e.g., selecting service providers, explaining program to employers and employees) Operating losses incurred while account maintenance costs exceed revenue from fees. Operating losses present the biggest financing challenge.

As a result, states expect early deficits which can be reduced with a higher default rate. Projected Cumulative Deficit for ORSP Under Initial Assumptions, by Year Biggest loss Source: CRR calculations.

A final important issue is whether or not Auto-IRAs are pre-empted by ERISA. A 1975 Safe Harbor indicated a Payroll Deduction IRA is not an ERISA plan if: The employer makes no contributions; Employee participation is “completely voluntary”; The employer merely acts as a facilitator; and The employer receives no consideration for expense.

An Obama Administration regulation attempted to offer additional clarity. The regulation offered a slight adjustment from “completely voluntary” to “voluntary” for state-run Auto-IRAs (many thought this adjustment was not needed). That regulation was disapproved of this past May using the Congressional Review Act. Litigation will likely decide whether the 1975 Safe Harbor covers the state Auto-IRAs.

Despite these issues, Oregon is live with encouraging results. Early results from their pilot program suggests 77 percent of workers end up participating – very close to the predictions described earlier. Workers who participate have tended to stay near the default contribution rate of 5 percent. Employers have typically spent less than 1 hour enrolling their employees.

Conclusion State Auto-IRAs offer an innovative way to expand retirement coverage to a quarter of the private sector workforce – and Oregon’s is launching this summer. Despite the risks and challenges, private-sector providers have demonstrated a willingness to work with states. The biggest barrier may not be with the implementation of the programs themselves, but from regulation.