Employer-sponsored retirement plans can be very effective in meeting retirement goals, but without a retirement plan at work, many Americans struggle to save. More than 55 million Americans work for businesses that do not offer retirement plans, and only about 32 percent of Americans are saving for retirement. State-sponsored retirement plans may help close the saving-for-retirement gap.
Do employers have to offer retirement plans?
The short answer is “no.” A complicated federal law, the Employee Retirement Income Security Act (ERISA), governs the issue. Retirement plans offered at work encourage employees to save because they make it easy to do so. Only 53 percent of people who work at a company with less than 100 employees have access to retirement benefits while 91 percent of those who work in companies with more than 500 employees do. The numbers for small businesses are even lower.
Retirement plans can be beneficial to businesses. They can be a good recruitment tool as they are a much sought-after work benefit. They also may offer the employer a tax benefit since Congress also wants to encourage saving for retirement. Finally, if the business is a small one, an employer-sponsored retirement plan may be a benefit to the business owner since he can take advantage of the plan himself.
State-sponsored employment programs
Some states have passed laws to create retirement programs to help workers not covered by corporate plans to save for retirement through payroll deductions. More than 25 states are considering the creation of state-facilitated retirement savings plans for small business employees, and Oregon and 10 other states along with the city of Seattle already offer the plans. Called “work-and-save” programs, some require employers who do not offer retirement plans to enroll their employees in state-sponsored plans. Most such plans have an option for employees to opt-out of participation. Others are more limited or make participation available but optional. State-sponsored plans do not include employer contribution and are privately managed meaning that private-sector providers manage the investment and other necessary services. They do not cost the employer anything to manage the plan, costs which may deter small businesses from offering retirement plans. There is no connection between government pensions and state-sponsored retirement programs.
Some people oppose state-sponsored plans, fearing that they will result in employers who already offer plans to drop them in favor of the ones offered by the state. Others believe that the lack of retirement accounts is the result of a lack of resources available to make contributions rather than plans in which to participate.
Of course, no one needs a retirement plan from work or from the state to save for retirement. Anyone with income can open a retirement account and start contributing. But, it is easier to save if there is a plan in place, so state-sponsored retirement plans might just help close the saving-for-retirement gap. A study by Boston College’s Center for Retirement Research found that the Oregon plan, OregonSaves, enrolled two out of three people eligible to participate and at the end of one year, participants saving 5 percent of their salaries had put $4.5 million into the plan.
Have something to add to this story? Comment below or join the discussion on Facebook.
Header image: ShutterStock