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Will Fewer Plans Produce More Savings?

Jerry Brown speaking at a microphone
California's Gov. Jerry Brown. Photo by Flickr user Neon Tommy.

For almost everyone fortunate enough to live a full adult life span, a time eventually comes when you can’t bring home a paycheck. You might lose a job and become unemployed; you might become disabled through illness or injury; or you just might age to the point where you need to retire.

In partnership with the federal government, every state offers unemployment coverage to its residents, although benefit levels and eligibility criteria vary widely. Five states (New York, California, New Jersey, Rhode Island and Hawaii) and Puerto Rico require employers to provide short-term disability coverage. And every state has a workers’ compensation program to address on-the-job injury – although, again, benefits and eligibility vary widely.

But no state presently mandates that employers provide retirement plans through their workplace.

As my colleague David Walters discussed in our firm’s Sentinel newsletter a little over a year ago, some states are working to change this status quo. As of last spring, 28 states either have passed or are considering plans that would create state-mandated, and often state-supervised, retirement plan alternatives for employers that do not currently provide such plans to their workers.

California was at the vanguard of this movement in 2012, when Gov. Jerry Brown signed the California Secure Choice Retirement Savings Trust Act into law. Though the plan is not set to take full effect until 2019, Secure Choice has already provided a model for many other states. Assuming it is implemented as planned, Secure Choice will require employers with as few as five employees to offer access to retirement accounts run by a state-appointed investment board. Participating employers will automatically enroll their staff, though employees will be able to adjust their payroll deductions or opt out entirely if they wish. Employers generally do not have to offer a match or otherwise contribute, though in some states they will be allowed to offer a match if they choose.

Yet Secure Choice and other similar state plans may soon face a regulatory stumbling block. Using the Congressional Review Act, the House passed resolutions to overturn two Labor Department regulations designed to encourage such state-run plans by exempting them from certain Employee Retirement Income Security Act (ERISA) requirements. If these regulations are indeed struck down, the change will effectively prevent states from offering plans with automatic enrollment and will potentially prevent large municipalities from offering auto-enrollment plans too. The New York City Council had been considering this option; its Retirement Security Study Group issued a report on the matter last fall.

As we have seen in private sector plans such as 401(k)s, opt-out plans massively outperform opt-in plans in participation rates. Fidelity reported that 76 percent of 20- to 24-year-old workers stay in opt-out plans, while only 20 percent sign up for opt-in versions. And while the 3 percent default savings rate offered by plans like California’s is probably too little for most savers, an automatic 3 percent rate that starts as soon as you enter the workforce is vastly preferable to not saving until years later, if at all.

If the House resolutions pass the Senate, President Trump is expected to sign them. While this outcome might not kill state-run plans outright, it would mean many state legislators would have to go back and redesign the plans from the ground up. Legislators in California and elsewhere have appealed to their Washington counterparts in an attempt to prevent this outcome. Some observers think the states that have already begun implementing such retirement savings programs may proceed with their plans regardless, ultimately referring the matter to the courts. But for the states still considering such plans, Congress’ decision could easily grind debate – and progress – to a halt.

I understand the concerns critics have raised about the added burdens on (typically small) employers who have no current retirement plans. I will concede there is at least a small degree of moral hazard from states that may feel obliged to backstop retirement funds that don’t perform up to expectations; I think the risks of corruption, malfeasance or simple incompetence in designing the plans and choosing money managers is considerably greater. And yes, as a rule it is unfair for government to set itself up in competition with the private sector, especially when government exempts itself from some rules (such as ERISA oversight and compliance requirements) that apply to everyone else.

But all of this is outweighed by the simple fact that old age inevitably arrives, and any savings plan to help people prepare is apt to be better than no savings plan at all. “No savings plan” is the plan many people have today.

Not only do many retirees and those approaching retirement lack savings, many still carry significant debt. Americans ages 65 to 74 owe more than five times the debt held by Americans in their age group 20 years ago, The Wall Street Journal recently reported. Some were not able to recover from losses, due to either the 2008-09 recession or personal financial woes. Others struggle with credit card debt or educational debt, either for themselves or their children. And health care costs are an increasing worry, even for those who did manage to build some savings; for those who did not, the prospects are even more daunting.

These state proposals are bare-bones plans that will not eliminate privately run plans, any more than state-mandated disability coverage has eliminated private disability insurance. (Which is to say, not at all.) The employee opt-out provisions will still permit individuals to exercise free choice to prioritize current needs over saving for the future. But for those whose biggest hurdle to saving is simple inertia, such plans could prove a financial life raft when they reach retirement age.

A lot of regulatory mandates are overreaching and pointless. They are immensely frustrating, and they poison the reservoir of patience and goodwill needed to propel a few worthwhile initiatives through the political process. Mandated employee savings plans certainly come with costs and potential drawbacks, but the benefits to individuals and society promise to be substantial. It would be worth trying to tap the last reserves of that goodwill reservoir to save one of the relatively few Obama-administration rulemaking initiatives that deserves a chance to at least reach maturity, if not a ripe old age.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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