A new report analyzes the issues, alternatives, and next steps for state-run savings initiatives.
State Savings Initiatives: Lessons from California and Connecticut, published by the Center for Retirement Research (CRR) at Boston College, is based on the experiences of California and Connecticut in evaluating these programs. The report first considers the “lessons learned” by these two states in their study of the issues.
Building the Participant Pool
The analysis notes that the key to the success of these programs – both in terms of increasing retirement security and in terms of feasibility – is achieving a large pool of participating employees. The researchers cited the auto-IRA approach, which requires firms to automatically enroll their employees, as “necessary” because: (1) small employers are not likely to offer plans on their own initiative; and (2) employees are much more likely to participate with auto-enrollment, as evidenced from the experience of 401(k)s.
They noted that the employer mandate combined with automatic enrollment greatly diminishes marketing costs for providers, and building the large asset base allows the state to command lower fees through institutional rather than retail pricing on program investments – so long as workers stay in the program.
Participation Rates
The report notes that to study participation, California and Connecticut performed separate online benefit-enrollment experiments in which participants were randomly assigned to programs with different contribution rates and asked about their decisions to remain enrolled or opt out. Those studies indicate that, depending on the state and the default contribution rate chosen, the participation rates range from 73% to 84%.
The studies found small differences in opt-out between defaults of 3% and 5% and 3% and 6%, and thus the CRR report notes that this suggests that states can likely enroll workers at a higher contribution rate without risking low participation, though it did note that Connecticut’s experiment does show that if contribution rates are automatically increased to 10% over four years, participation will be lower.
The report noted that, in addition to contribution rates, Connecticut’s experiment also examined how uncovered workers respond to two other potential design features: annuitization and guarantees. Apparently being told that their account balances at retirement will be used to provide a monthly income “like Social Security” (a proxy for the annuitization concept) drew a positive participation result. However, the response was not as positive on guarantees, because of the cost of those, according to the report.
Employer Perspective
The report also acknowledged employer resistance to these programs, which it categorized in three main concerns; concern that the state (Connecticut) could not manage the program effectively, citing the state’s struggles with its pension plans, employers did not like being “mandated” to offer a retirement plan and did not think that their employees should be “forced” to save for retirement (this in Connecticut), and the administrative burden of enrolling employees and explaining the program to them.
The report says the state’s research suggested some effective responses: Clarify that employees’ money will be managed by a private sector provider and kept separate from the state’s pension fund, make it clear to employers that participation by employees is voluntary since they have the ability to opt out, and minimize the administrative burden by, as suggested by California employers, including uniform eligibility requirements (i.e., no age or tenure requirements), limiting the frequency of employee contribution rate changes, having the recordkeeper rather than employers perform auto-escalation, and providing the employer with educational materials to give to employees.
They also noted that employers were not likely to discourage participation, based on a Connecticut phone survey in which just 9% indicated that they would encourage their workers to opt out.
Implementation Focus
As for implementation, the report identifies several areas of focus:
- Minimize employer burden
- Create a recordkeeping platform for auto-IRAs
- Comply with the Patriot Act without affecting participation
- Develop an efficient enforcement mechanism
Ultimately, the researchers note that while these findings are promising, much remains to be settled. Moreover, since neither California nor Connecticut has actually implemented its program, the extent of the burden on employees and employers is still unclear.
