Iowa, Idaho, and Montana Rank Best For Access to Retirement Plans in the Workplace

Florida, Georgia, and Rhode Island rank lowest, according to analysis from the Economic Innovation Group.

Florida, Georgia, and Rhode Island have the lowest rates of access to employer-provided retirement plans nationally, lagging behind national leaders by as much as 25%, according to recent research from the DC-based Economic Innovation Group.

The findings are based on an analysis of state-level data from the Bureau of Labor Statistics’ population survey, as of 2021 year end. States with the lowest share of workers who have access to a plan were Florida (33%), Georgia (37%), and Rhode Island (38%). Those figures lag well behind the national state leaders in terms of access, which are: Iowa (58%), Idaho (57%), and Montana (55%), according to EIG associate economist Ben Glasner.

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These numbers compare to a national state average of 46% of employees with access to a workplace plan, according to EIG’s findings. This policy and lobby group cites this data as an argument for a federally-sponsored national retirement program.

“Far too many U.S. workers—particularly low-income individuals—slip through the gaps in the current retirement system, leaving millions across the country with inadequate savings,” Glasner wrote in the report. “Retirement accounts are the largest source of aggregate fungible wealth for American households and are an important tool to build a nest egg for the future. Unfortunately, access to employer-provided retirement plans remains deeply divided across earning levels and regions of the country.”

In its regional analysis of workplace retirement plans, EIG found that the Midwest had the highest rates of access at 49%. The southern states came in last at 42%, according to the report.

As of the most recent count this year, 18 states have enacted mandatory or state-facilitated retirement plans for businesses. None of either the top or bottom states listed in EIG’s report have state-facilitated plans; Virginia is the only southern state with a mandatory plan.

Even when workers are offered a workplace retirement plan, there is still a significant gap between access as well as participation when compared to the rest of the workforce, according to EIG.

Of those workers making $37,000 or less per year, 30% have access to an employer-provided plan. And among that group, just 19% participate in the plan, as compared to 37% of the total workforce, EIG wrote.

“The large and persistent gap in participation points to the difficulties many low-income workers have setting aside savings for retirement even when plans are available to them,” EIG wrote. “Policymakers aiming to close the retirement savings gap must therefore confront a two-pronged challenge: opening up access and increasing participation. Simply encouraging greater access to retirement plans may not be enough to increase take-up among low-income workers, particularly when every dollar is tight.”

EIG positions its findings to back bipartisan retirement legislation proposed last year called the Retirement Savings for America Act. The act proposes a national government-sponsored retirement program that would include automatic enrollment and federal matching for employee contributions.

The EIG and its push for a federal retirement plan was called out for conflicting with the private retirement industry by leaders of the National Association of Plan Advisors at their annual conference in San Diego.

Brian Graff, executive director and CEO of NAPA, noted that the program would undercut legislation already underway to help reduce the coverage gap, including the sweeping retirement legislation in SECURE 2.0 that will bring further incentives as well as mandates to retirement plan sponsors in coming years.

With ‘Rothification’ of Retirement Savings, Vanguard Stresses Education

Vanguard’s retirement head discusses SECURE 2.0’s Roth provisions and the need for plan sponsor communication to participants.

The “Rothification” of retirement savings will gain steam in 2024, as the SECURE 2.0 Act of 2022 mandated Roth catch-up contributions for those over the age of 50 who make more than $145,000 a year is scheduled to go into effect.

But implementation, while mandatory, will still need consultation and education for plan sponsors to understand—and communicate—the potential benefit of post-tax Roth saving to participants, according to David Stinnett, a principal in strategic retirement consulting at the Vanguard Group.

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“There are advantages to using a Roth, but we need to continue to educate participants on those advantages, depending on their personal situation,” Stinnett says.

SECURE 2.0 has multiple provisions that boost Roth 401(k) and individual retirement account savings, which are funded with post-tax income. Those include the 2024 mandatory Roth catch-up for high-income earners; a Roth option for employer matching contributions if the contributions are fully vested; and, also beginning in 2024, participants with Roth accounts are no longer subject to pre-death required minimum distributions.

As of the end of 2022, 80% of plan sponsors were already offering Roth contributions, according to Vanguard commentary published in July. Meanwhile, 17% of participants contribute to Roth accounts, a significant jump from 2018, when just 11% were contributing to the savings vehicle, according to the researchers.

Retirement industry groups have been lobbying for more time for Roth regulations to take hold, noting the recordkeeping and administrative issues that arise from both making Roth contributions available and sorting out payroll processing with the $145,000 threshold in mind.

Stinnett says the plan sponsors his team works with are prepared to implement Roth options, but the bigger push is around education and communication.

“Our role now is to discuss the benefits for participants,” he says. “There are a number of tax benefits that can come from Roth savings, but it will depend on the individual.”

Vanguard’s report noted that having a sizable Roth balance can provide tax diversification and lower overall tax liability by reducing the need to draw down taxable accounts such as 401(k) and traditional IRA savings accounts.

The authors also noted, however, that Roth options are not the best solutions for every saver. Some plan participants may benefit from pre-tax accounts, including those whose income and tax rate are both likely to be reduced in retirement or who have only temporary high income.

Whatever a participant’s situation for participants, plan sponsors should be providing targeted communications about Roth options to their employees, Vanguard noted.

“Once the Roth option has been added to a plan, sponsors should consider how to educate participants about the benefits of Roth contributions,” the report’s authors wrote. “Given the tax intricacies of Roth accounts, some participants find them difficult to fully comprehend. Because of this, a targeted, long-term approach to communication often works best.”

Beyond Roth options, Stinnett sees further benefits for participants coming out of SECURE 2.0 to improve overall financial well-being.

Stinnett notes that emergency savings programs are already available to participants and can be a good vehicle to prevent savers from taking plan loans or outright withdrawals. Further integration will depend on plan sponsors and their advisers being more deliberate in adding emergency programs to plan design, he says.

Meanwhile, student loan matching has potential to further help participants and is a subject of discussion with plan sponsor clients, Stinnett says. But getting recordkeepers and plan sponsors to put in place the processes necessary to administer such a benefit will take time.

“SECURE 2.0 came with a lot of excitement and brought good ideas to the table,” he said. “Implementation, as with most legislation, will take time.”

 

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