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Do State-Run Mandatory Retirement Plans Help Workers?

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About half of the U.S. private-sector workforce is covered by employer-sponsored retirement plans. But what about workers who don’t have this option? A number of states require firms that don’t offer a retirement plan to enroll their workers in a state-run program.

Academic researchers John Chalmers, Olivia S. Mitchell, Jonathan Reuter and Mingli Zhong, in a National Bureau of Economic Research study, Auto-Enrollment Plans for The People: Choices and Outcomes in OregonSaves, used the state program as a test case to analyze how it worked, the level of interest and how it affected retirement savings plans.

In 2015, the state of Oregon passed a bill to mandate OregonSaves for private companies that didn’t offer 401(k)s or similar programs.

The program is structured as a Roth IRA, and employees are automatically enrolled. The authors looked at who opted out of OregonSaves and why, how the program affected saving patterns for those who participated, and whether it meaningfully increased retirement savings.

What prompted OregonSaves, the study says, was that only 22.1% of employees who worked at a firm without a retirement savings program had actually opened an IRA, and only 7.6% were actively saving. In other words, opening and saving on their own wasn’t a popular option for employees.

The study posited three reasons for those without mandatory savings programs not to save: One was the “search cost,” another was “can’t afford to save” and the third was “don’t need to save.”

The authors also stated that the OregonSaves program gave them insights into the saving patterns of lower-income workers employed by smaller companies.

“Our analysis of individual-level administrative data thus sheds light on participation decisions, contribution rates, and the evolution of account balances, as well as reasons that employees give for opting out of OregonSaves,” the authors stated.

Initial Findings

The study looked at account-level data from August 2018 through April 2020, and found that the program is “generating savings for a substantial number of employees.”  Also:

  • More than 67,000 employees accumulated over $51 million through April (and despite the pandemic, more $79 million through November 2020).
  • The participation rate was 62.4%, “significantly below” levels in firm-sponsored 401(k) plans.
  • Of those who opt out, 30.3% state they “can’t afford to save,” not surprising as many companies using OregonSaves are in low-wage industries.
  • Younger employees were more likely to opt out.
  • Opt-out rates are higher when the unemployment rate is higher.
  • The average account balance was $754, and average monthly account-level inflow was $117. That said, the accounts with inflows fell from 65.6% in August 2018 to 34.4% in April 2020, “a pattern largely driven by job turnover,” the authors state. This coincides with average outflow rising from $355 in August 2018 to $590 in April 2020.

The authors conclude that the OregonSaves program “meaningfully increased employee savings by reducing search costs …

“Nevertheless, we have also identified limits to what automatic-enrollment savings plans can achieve when expanded to workers in industries and firms with low wages, volatile wages, and high turnover rates,” the authors state.

They added: “Less clear is whether these accounts will eventually grow into important vehicles for retirement saving.”

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