More states jumping onto secure choice bandwagon

Updated with correction

When it comes to looking at how states are addressing retirement preparedness among their private-sector workers, it is faster to count the states that have not started.

Since 2012, 43 states have either considered or enacted legislation to study or begin implementing state-facilitated retirement savings programs for their private-sector workers not already covered. Last year was busier than ever, with legislation introduced in at least 24 states and cities. Barring disruptions like the current COVID-19 crisis, which could paralyze legislatures everywhere, there is legislative activity in 17 states and at least seven states actively studying how to implement a program.

The list of enacted so-called secure choice programs so far includes 11 states and the city of Seattle, with Oregon, Illinois and California already taking participant contributions. The latest addition was New Mexico, where Gov. Michelle Lujan Grisham on Feb. 26 signed the New Mexico Work and Save Act, creating a voluntary automatic low-cost retirement savings option for workers without employer-based retirement accounts, plus an online marketplace of private-sector providers for employers.

It is happening in blue and red states, including North Carolina and Virginia. Legislators overwhelmingly approved a bill March 4 directing Virginia College Savings Plan officials to study the feasibility and design options for a state-sponsored private-sector retirement plan and to report back by Dec. 15. A similar study effort launched by Colorado's General Assembly in 2019 led to the introduction of a Colorado Senate bill March 10 to establish a state-sponsored IRA program.

Proponents of private-sector solutions at the state level are also celebrating removal of one potential hurdle: a 2018 legal challenge filed against the $2.3 million CalSavers Retirement Savings Program by the California-based Howard Jarvis Taxpayers Association, which argued unsuccessfully that it was preempted by the Employee Retirement Income Security Act and no taxpayer funds should be spent on it.

The March 11 dismissal of the case for a second time "reinforces the long-held belief of the states that they have been on sound legal ground to adopt these auto-IRA savings programs. I'm even more optimistic now that we might see one or two new state auto-IRA programs enacted later this year," said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University.

"It comes at a great time during the 2020 legislative sessions when many more states are considering new programs this year because of the successful and popular launches of programs in Oregon, Illinois and California," Ms. Antonelli said.

A growing body of data showing the potential impact of not doing anything is also driving acceptance, experts say.

"These state studies are so valuable because they help make real for legislators the significant budget and economic impacts of an aging population unprepared financially for retirement. In Colorado alone, the budget costs and forgone tax revenues are estimated to be almost $10 billion over the next 15 years. That's a major economic hit that can be easily avoided today by simply making it easier to connect workers now with a way to save," Ms. Antonelli said.

Backers of a Pennsylvania House bill promoting a private-sector program say it can help avoid a projected $14 billion in additional social services for unprepared seniors between 2015 and 2030, and the loss of $1.4 billion in tax revenue from reduced consumer spending.

"The data matters," said Lisa A. Massena, a principal with Massena Associates LLC in West Linn, Ore., and former executive director of the Oregon Retirement Savings Plan, the country's first state-sponsored private-sector retirement program in operation. "I think people already understand that there is an issue and when you quantify an issue, they begin to understand the importance," she said.

Resistance from employers and retirement services providers may be softening, too, in part by passage of the federal SECURE Act, which allows for more private-sector "open" multiple employer plans. "The programs that are up and running are demonstrating that you are getting new savers into the system, you are getting new plans. Coverage is going up," Ms. Massena said.

Those first movers are helping pave the way for other states by sharing lessons learned.

"The most common model we see proposed is the auto-IRA approach and, even with this model, we see a trend toward standardization of program design, including similar default contribution levels, investments and governance. There have been concerns that every state would be different, but over time we are seeing them become more similar," Ms. Antonelli said.

Connecticut, Maryland and New Jersey also opted for the auto-IRA approach. New York chose a voluntary payroll deduction IRA, while Massachusetts and Vermont are working on open MEPs. Washington state has a voluntary marketplace.

The Illinois Secure Choice program, the first state venture authorized by a 2015 law, is now celebrating 5,369 registered employers, 57,049 participant accounts and $16.2 million in assets. A new analysis of Oregon's program by the Center for Retirement Research at Boston College found that setting up payroll deductions took longer than anticipated, but "the good news is that OregonSaves' rollout is speeding up as the program matures," the report said. So far, it has more than 5,300 registered employers, 66,383 participant accounts and $45 million in assets.

One key lesson was the importance of reaching out to the employer community and making it as easy as possible for them, said CalSavers Executive Director Katie Selenski. Launched July 1 with the first employer deadline coming up June 30, CalSavers now has $2.3 million in assets, more than 1,500 employers signed up and an average contribution rate of 5.16%. Officials there are now working to integrate payroll technology to make it even easier for employers and preparing a research effort to measure program features and impact.

In the current market shakiness, it hasn't hurt that more than 86% of participants remain in the default option of investing the first $1,000 in a capital preservation fund and the rest in a target-date fund. "I think we have reason to be calm here because of that design decision," Ms. Selenski said.