A huge retirement savings shortfall is underway — and many are calling it a crisis. Consequently, some states are launching their own retirement savings programs for private businesses and workers.

The situation

  • 65% of Americans say they likely “will have to work past retirement age to have enough money to retire.”
  • Americans — regardless of political party affiliation — overwhelmingly believe the country is facing a retirement crisis.
  • Only four in 10 businesses with under 100 employees offer retirement benefits.
  • 72% of companies with 10 or fewer employees do not provide a retirement plan.

These are the numbers from surveys by the National Institute on Retirement Security (2019), LIMRA (2018), and SCORE (2019).

According to the SCORE survey, the top two reasons businesses gave for not supplying a retirement plan are expense and administrative burdens.

How states are responding

Some states have passed legislation which require employers to offer a qualified retirement plan — such as a 401(k) or SIMPLE IRA — either through the state-run program or the private market. A few other states have developed voluntary programs for private-sector businesses and workers.

Currently, the following states have enacted legislation establishing some type of retirement savings program:

  • California
  • Connecticut
  • Illinois
  • Maryland
  • Massachusetts
  • New Jersey
  • New York
  • Oregon
  • Vermont
  • Washington

The city of Seattle has enacted legislation, as well.

How state-run programs work

For mandatory programs, the retirement plan typically comes in the form of an automatic-enrollment payroll-deduction Roth IRA. An exception is Massachusetts’ CORE Plan, which offers a 401(k) plan and applies only to nonprofits with 20 or fewer employees.

Examples of mandatory state-run Roth IRAs include:

  • OregonSaves, sponsored by the state of Oregon. All employers in Oregon must offer their employees a qualified retirement savings plan either through OregonSaves or the private market by the state-mandated deadline.
  • CalSavers, sponsored by the state of California. If you have at least five employees in California and do not offer a qualified retirement plan, you must do so either through CalSavers or the private market by the state-mandated deadline. Note that CalSavers is currently being challenged in court by the federal government. Meanwhile, the legislation stands.
  • Illinois Secure Choice, sponsored by the state of Illinois. If you have 25 or more employees in Illinois, have been in business for at least two years, and do not offer a retirement plan, you must do so either through Illinois Secure Choice or the private market by the state-mandated deadline.

Registration deadlines for these programs vary by employer size.

Self-employed individuals can join OregonSaves and CalSavers. However, Illinois Secure Choice is currently available only to employees. (According to the Illinois Secure Choice website, self-employed people will be able to participate in the future.)

Other states with mandatory retirement savings programs are Connecticut, Maryland, and New Jersey. Again, the programs are mandatory only for eligible employers that do not offer a retirement plan. Eligible employers can choose either the state-run plan or a private-market plan — but they must offer a qualified plan. If they don’t, they may face penalties for noncompliance.

Common features of mandatory state-run Roth IRAs:

  • The program is free for employers and is funded by workers’ investments.
  • Employers must register their employees in the program.
  • Employees who do not opt-out after being informed of their registration are automatically enrolled.
  • Automatic enrollment comes with a default contributions rate, which employees can change if they want.
  • Employees can opt-in and opt-out of the program whenever they choose.
  • Employers are responsible for deducting employees’ contributions from their wages and remitting the amounts to the state’s program administrator.
  • Employers do not have to perform fiduciary duties.
  • Employees can take their Roth IRA with them if they leave their employer.
  • Employee contributions cannot exceed federal Roth IRA limits.

Voluntary programs

In 2018, Washington implemented a voluntary state-run marketplace, which connects employers and self-employed individuals to financial services companies that offer low-cost retirement plans. Further, in 2018, New York adopted a voluntary payroll-deduction Roth IRA program that private businesses can extend to their employees.

It’s only getting started

Over 30 states have reportedly considered legislation that would allow a state-run retirement savings program. Dozens have actually introduced legislation. Though some of these measures have failed, or are destined to fail, others are making it through.