While there’s now some hope that Congress might start meaningful discussions about restoring solvency to Social Security, that’s only one leg of the retirement tripod — Social Security, employer pensions or retirement plans, and personal savings — that needs some work.
Too few of us, in particular those nearing retirement, have saved enough for retirement. Where some financial advisers suggest retirees have savings equal to about eight times their annual working salary, about 45 percent of U.S. households have next to nothing set aside for retirement, much less invested in a retirement account such as a 401(k) or Individual Retirement Account.
In Washington state, an estimated 2 million workers are not making regular contributions to such a retirement plan, and many of those are lower-income workers who are vulnerable to poverty in retirement.
And there’s now one less avenue for such saving, following the Trump administration’s decision to close out its predecessor’s myRA program, a federally administered plan that allowed direct deposits from checking accounts into a Roth IRA, didn’t require a minimum deposit and charged no fees. Gone, largely out of spite.
Now, legislation in the state Senate could expand access to retirement savings by establishing the Secure Choice Retirement Savings program within the state’s Department of Commerce. The legislation, Senate Bill 5740, is modeled after a similar program in Oregon that has now been in effect for about a year and a half and has enrolled about 28,000 who were not saving before and have now invested about $13 million to date.
Working through employers, the Oregon plan automatically enrolls employees in a Roth IRA, but allows those employees to opt out or change their rate of investment. The program was explained to the Senate committee on Financial Institutions, Economic Development and Trade by Michael Parker, executive director of Oregon’s 529 college savings plan, but who also has been involved in the Oregon program, called OregonSaves.
Workers, predominately at smaller employers who don’t offer 401(k)s or other retirement benefit plans, are automatically enrolled with 5 percent deducted after-tax from their paychecks and deposited into a Roth IRA, Parker explained. Each year the deduction is increased 1 percentage point, until a ceiling of 10 percent is reached. Employees have the ability to opt out completely or adjust their paycheck deduction to lower or higher rates.
An annual fee is charged, but is capped at $10.50 for every $1,000 invested.
And because it’s a Roth IRA, and contributions are made after-tax, there’s no penalty for withdrawal.
Employers are asked to provide information about the program and assist in enrolling employees with the state program. But the program also can be administered through payroll processors that many employers use. Unlike 401(k) programs, employers don’t offer a matching contribution to IRAs through the Oregon program.
Employees have always had the option of signing up for an IRA or 401(K) on their own, but few do so, and the automatic enrollment is seen as a way to get more people saving. Workers are 15 times more likely to save for retirement if offered a workplace program.
In Oregon, about 75 percent of those who were enrolled have decided to continue, Parker said, and very few bailed from the program after the first 1 percent increase went into effect.
Washington, by comparison, has offered the voluntary Washington State Retirement Marketplace since 2015, also administered by the Department of Commerce, but the results have not been impressive, noted Sen. Mark Mullet, D-Issaquah, who is among the legislation’s sponsors. Locally, Sen. Steve Hobbs, D-Lake Stevens, also is a sponsor.
Because it’s focused on first-time investors whose initial contributions are relatively small, the voluntary program has had difficulty in attracting financial investment companies to offer plans. Only three provide plans, none among the bigger names in investment.
“When somebody has only $500 to $1,000 in their account, it’s not a profitable account for that institution,” Mullet said.
The result: Fewer than 100 people have enrolled in the state’s voluntary program.
Mullet and Parker both said that Washington’s program could work in tandem with Oregon’s, essentially pooling assets to attract more investment programs and resulting in lower fees for participants. Other states considering similar programs include California, Connecticut, Illinois, Maryland and New York, as well as New York City.
Some have suggested making fixes to the voluntary state program, but with fewer than 100 participants, it might require a significant overhaul to increase numbers.
“Rather than patch up a failed experiment, we should piggyback with a program that works,” said John Burbank, executive director of the Economic Opportunity Institute, a nonprofit and nonpartisan economic policy center, at the hearing. “This is a necessary step forward.”
Employees have seen an increase in their paycheck deductions, such as for the Paid Family Leave act, for which deductions began this year. Another piece of legislation, the Long-Term Care Act, would make a similar deduction that would provide a benefit for long-term and elder care.
The difference with the Secure Choice plan is that participation is optional once the account has been established. We’re betting — as Oregon has seen — most will want to stay in the program, knowing their retirements can be a little more secure.