2 More States Create Retirement Savings Plans for Private Sector Workers

As of this month, 18 states have enacted state-facilitated retirement savings programs for private sector workers, up from 16 at the beginning of the year.

The recent additions of Missouri’s voluntary, multiple employer plan for small businesses and Minnesota’s automatic IRA program—along with Vermont’s move from a MEP to an auto-IRA—are part of an ongoing trend to provide increased access to retirement planning for a larger swath of Americans.

Missouri’s MEP

As a voluntary MEP, Missouri will join Massachusetts as the only two states that offer MEPs.

A state-facilitated “open” MEP, according to Georgetown University’s Center for Retirement Initiatives, is a 401(k) “group plan” in which otherwise unrelated employers in the state join together in this case as part of a state-facilitated plan, as defined by the Department of Labor.

A MEP allows 401(k) participants to enjoy higher contribution limits than an auto-IRA offering and allows employers to match employee contributions. These plans can also reduce the administrative and fiduciary burdens that small employers would face if providing a retirement savings program on their own.

Missouri SB 298, sponsored by State Senator Lauren Author, created the Missouri Workplace Retirement Savings Board, which will design, develop and implement Missouri’s plan, which is required to start by September 1, 2024.

Employees at participating companies will default to a 5% salary deferral but may choose to opt out or to change their contribution amount. The board is allowed to automatically increase the contribution amount of each participant on a yearly basis, but not by more than 1% per year.

Minnesota’s Auto-IRA

The Minnesota Secure Choice Retirement Program Act, introduced by State Senator Sandra Pappas, will automatically enroll workers at participating companies in an IRA in which a portion of their wages will be set aside every pay period.

The Minnesota Senate voted 34 to 33 in favor of the bill on May 11 after the Minnesota House of Representatives passed the bill on May 1 by a vote of 71 to 60. Companies in the state with five or more employees that do not currently offer a retirement plan will be required to participate. The measure is awaiting the signature of Minnesota Governor Tim Walz, according to the National Association of Plan Advisers.

“Historically, we usually see the adoption of one or two new state programs every year, so it is exciting that we already have two new programs with Missouri and Minnesota, which increases the total number of program states to 18,” says Angela Antonelli, a research professor and executive director of Georgetown’s CRI. “We may still see one or two more new programs adopted before the end of 2023.”

Vermont Switches to Auto-IRA from MEP

Vermont approved a MEP in 2017, but according to Antonelli, it was never actually implemented, and Vermont now plans to adopt an auto-IRA program.

The Vermont Senate unanimously approved the VTSaves Retirement Program in April, and the bill, S-135, was approved by the Vermont House of Representatives on May 9. The bill includes a $750,000 appropriation from the state’s general fund to the state treasurer’s office to establish and administer the VTSaves program, which is intended to begin on July 1, 2025, for all eligible employers with 25 or more covered employees.

As opposed to MEPs, which are voluntary, an auto-IRA requires employers who do not already have a qualified retirement plan to register their workers to be automatically enrolled.

With state auto-IRA programs, the role of the employer remains administrative only: enrolling workers and facilitating the payroll contribution. Employers are also prohibited from contributing to their employees’ accounts.

“The program change in Vermont reflects a trend toward … auto-IRA states,” Antonelli says. “13 of the now 18 states are auto-IRA states. … Experience has shown that requiring employers to take action is much more effective [than voluntary programs] in boosting employer and employee participation.”

Antonelli says voluntary programs often struggle more than mandatory, automatic ones in terms of participation, making it harder to close the retirement-access gap with voluntary programs.

Many Private Sector Workers Lack Retirement Savings

Antonelli adds that states know the cost of doing nothing to address the ageing population is “simply too great,” and these state-sponsored programs can help reduce the potential fiscal and economic burdens that states and the federal government will face.

Estimates place the national aggregate cost to support old Americans who don’t have retirement savings or pension plans over the next 20 years at more than $1.3 trillion, according to Pew Charitable Trusts.

According to Pew’s research, as many as 56 million private sector workers lack access to a retirement savings plan through their jobs. Analysts who conducted the study for the Pew Charitable Trusts estimated that these limited retirement savings could lead to a cumulative additional cost to the federal government of $964 billion between 2021 and 2040.

State spending to support residents who lack retirement savings administrative costs, required state match formulas and supplemental state benefits—could total another $334 billion over that period, according to Pew.

If households saved an additional $1,685 per year—about $140 per month—the Pew report states that over a 30-year period, they could erase the retirement savings gap, eliminate the taxpayer burden and help people maintain their lifestyles in retirement.

Pew experts argue that these state automated retirement programs provide a way to steadily boost worker savings and help avoid some of the projected state and federal cost increases. In the four states that have implemented such programs and started regular paycheck withdrawals, average savings rates are about $140 per month per worker, according to Pew.

Workers also can opt out of the programs, while those who stay in can change their contributions at regular intervals.

In fact, state-facilitated retirement savings plans for private sector workers that do not have workplace plans may have a positive effect on the creation and retention of private plans, another Pew research article states, basing its analysis on Department of Labor data.

Antonelli says that, as of April 30, state programs are administering more than $839 million in assets accumulated by almost 700,000 workers and more than 150,000 employers, and that only includes the six programs reporting data: CalSavers, MyCTSavings, Illinois Secure Choice, OregonSaves, the Massachusetts CORE Plan and Washington’s Retirement Marketplace.

Other programs are in their early stages, and Antonelli says she expects to see more states launch programs in 2024 and 2025.