Data and Research July 20, 2023

State Auto-IRA Programs Motivate Firms to Create 401(k) Accounts, Research Shows

The adoption of state auto-IRA programs has proven to be a catalyst for more companies in those states to offer their own retirement savings accounts, researchers found.

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More employers are offering their own retirement plans in states with mandatory auto-IRA programs, giving a wider swath of employees a chance to save for the future, according to research published by the National Bureau of Economic Research.  

Researchers at the FDIC, the World Bank, Brown University and George Mason University found that the adoption of state auto-IRA programs, and the accompanying mandates that private employers either offer a retirement plan or enroll in the state plan, can actually be a catalyst for firms in those states to launch their own retirement savings plans.  

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State auto-IRA programs in California, Oregon and Illinois, for example, have increased by 3% the likelihood that residents in those states work for a firm that offers its own retirement plan and by 33% the probability that individuals are saving in those employer plans, the researchers found. 

In the report, entitled, “How Do Firms Respond to State Retirement Plan Mandates?” the authors used both firm-level data from Form 5500 filings and individual-level data from the Census Bureau’s Current Population Survey to examine the impact of auto-IRA rollout on employer-sponsored retirement plan offerings. 

“Using rich individual-level and firm-level datasets … we find that auto-IRA legislation has a positive and significant effect on the probability of employers offering an [employer-sponsored retirement plan], the probability that an employee is included in an ESRP, and the number of participants in existing ESRPs,” the report concluded. 

Currently, 18 states have enacted a variety of state-facilitated retirement savings programs for private sector workers who would not otherwise have access to a retirement account. Nevada and Vermont are the two latest states to approve such programs. 

A total of seven states now require employers that do not have retirement plans to automatically enroll their workers in an IRA, and others have passed legislation to create similar programs. 

Theoretically, auto-IRA legislation could either increase, decrease or leave unchanged firms’ inclination to provide employer-sponsored retirement plans, researchers argued. For example, firms could terminate a savings plan and enroll workers in the state-created IRA instead. Alternatively, the new legislation could motivate firms to start a plan by imposing administrative costs on employers that do not offer them. 

When evaluating individual-level data, researchers found that individuals in states with an auto-IRA program are 1.4 percentage points more likely to work for an employer who offers a retirement plan during the post-adoption period. 

In addition, when evaluating firm-level data, the probability of a firm offering at least one employer-sponsored retirement plan increases by 0.9 percentage points in states with an auto-IRA mandate, relative to the states without one, after the policy implementation, the report stated. 

While trends in Oregon, California and Illinois cannot necessarily be stretched to apply to all the states that have established or are pursuing voluntary retirement savings plan programs, Kimberly Blanton at the Center for Retirement Research at Boston College wrote that the early results from these states are “promising” and that “auto-IRAs may be an effective way to expand participation in employer-based savings plans.” 

A research report published by Pew Charitable Trusts in December 2022 similarly found that in one year after the first three auto-IRA programs launched in Oregon (2017), Illinois (2018) and California (2019), there was a 35% higher growth rate among new 401(k) plans at private businesses in those states, as compared with other states.  

This likely occurs because there are limitations to state programs, which do not provide a matching contribution like many 401(k)s do. Contributions limits in auto-IRAs are also lower than in 401(k) plans.  

An individual can put up to $6,500 in a Roth IRA in 2023, but higher earners are limited in what they can contribute. In a 401(k) plan, people can contribute up to $22,500 in 2023, with anyone aged 50 or older allowed an extra $7,500. 

However, many believe these state-sponsored programs can help reduce the potential fiscal and economic burdens that states and the federal government will face as larger age cohorts reach retirement age, and they can help close the access gap to retirement savings. 

Administration July 19, 2023

Indiana Erector Set Manufacturer’s Former Chairman Sued by ESOP Participants

The plaintiffs allege fiduciary breaches occurred in a leveraged buyout after the company founder’s death.

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Former employees of Indiana manufacturer 80/20 Inc. sued the former company chairman on July 14 for multiple breaches of fiduciary duty connected to a leveraged buyout that followed its founder’s 2019 death and ignored his will that stated a preference for the 80/20, Inc. Employee Stock Ownership Plan to buy Wood’s shares.

In the suit, Walther et al. v. Wood et al., plaintiffs Martha Walter, Trent Kumfer and Jayme Lea, on behalf of 80/20’s employees, filed a complaint in U.S. District Court for the Northern District of Indiana against John Wood—former chairman of the company and son of entrepreneur and company founder Don Wood—and Brian Eagle, an attorney and independent trustee of the ESOP. The complaint alleges three counts of fiduciary breach against each individual, while also charging the purchasers, private equity firms MPE Partners II LP and MPE Partners III LP with unlawfully taking advantage of Wood and Eagle’s ERISA violations.

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“Defendants John Wood and Brian Eagle violated their ERISA fiduciary duties by failing to exercise or enforce the ESOP’s right to buy 80/20, Inc. shares from the company founder’s estate,” the complaint states. “They further violated ERISA by divesting the ESOP from the company altogether for less than fair value in a deal that benefited company leadership at the expense of the ESOP. Defendants MPE Partners II, L.P. and MPE Partners III, L.P. acquired the company’s equity knowing that their bargain was the result of their co-Defendants’ violations of ERISA.”

The complaint asks the court to hold Wood and Eagle liable to the purported class for damages for lost investment opportunity and for losses on the sale proceeds of ESOP shares diverted to the company leadership and for any ill-gotten gains, as well as an equitable lien or constructive trust on income distributions and capital gains received by or owed to MPE.

None of the defendants responded to a request for comment on the litigation.

80/20’s Origins

Don Wood founded 80/20 Inc. in Fort Wayne, Indiana, in 1986, and his three sons helped him develop the company and are credited as co-founders. The company manufactures patented building components known as The Industrial Erector Set, employing about 400 workers in Columbia City, Indiana.

The ESOP was established January 1, 2016, allowing employees to own company stock and receive retirement benefits based on the company’s value. The plan was administered by 80/20 at the company’s Indiana headquarters.

At the time, Don Wood was the sole voting shareholder and he restated his will in July 2016, adding a new clause related to the disposition of his interest in 80/20 upon his death: “If my estate owns an interest in 80/20, Inc., it is my intent that said interest be sold … in a commercially reasonable manner,” the will reads, according to the complaint. “My preference would be to sell 80/20, Inc. to an employee stock ownership plan for the benefit of the employees of 80/20, Inc., and alternatively to a third-party purchaser.”

Private Equity Enters

According to the complaint, one of Don Wood’s sons, John Wood, returned to the company as chairman of its board in 2019, shortly before his father’s death.

In March 2021, MPE acquired a controlling equity position in t80/20 and retains a controlling equity position, according to the complaint.

The ESOP’s shares of 80/20 were sold to MPE partners in 2021 for $18.2 million, of which plan participants received an estimated $10.1 million—the $8.1 million difference represents the ESOP’s remaining debt to the company after a dividend paydown of $2.17 million—according to the complaint.

Per the terms of the 2021 deal, the ESOP was terminated, and all ESOP shares were redeemed by the company: Account balances were distributed to participants during 2021 and 2022, the complaint shows.

the complaint states. “Discovery will show that MPE granted the bonuses to leadership as consideration for their complicity in steering the acquisition to MPE and away from the ESOP and completing the redemption of the ESOP’s shares. The bonuses represented value of the disposition of the ESOP’s shares that should have been received by the ESOP but was instead diverted to company leadership, ” according to the complaint.

The final step to close the deal with MPE was the conversion of the company to a limited liability company, valuing the new company at an estimated $182 million; however, the plaintiffs alleged that the fair market value was significantly higher.

“Plaintiffs estimate that 80/20 had approximately $105 million in sales in 2020, based on historic revenue and growth rates,” the complaint states. “The average machinery company at the time was worth 3.06 times its sales—supporting a $321 million valuation of 80/20 at the time of the MPE deal.”

The plaintiffs argue that the valuation was confirmed by comparisons with companies in the general industrial machinery and equipment category, showing the median company was worth 3.32 times its sales—supporting a $349 million valuation of 80/20.

“Had the ESOP received fair consideration for its shares in line with the company’s fair market value, ESOP participants would have received around [$]15 million more in distributions upon termination of the ESOP,” according to the complaint.

The ESOP included about 350 participants when it was terminated, according to the complaint. The purported class of plaintiffs are represented by attorneys with the law offices of Engstrom Lee LLC, based in Minneapolis.

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