HD16 - HB 1998 Saving for Retirement [Chapter 669, 2015 Acts of Assembly]
Retirement security for Americans has become an area of increasing concern for both state and federal policymakers, leading to a number of programs intended to encourage saving for retirement. Behavioral finance studies indicate that a work-based retirement option tends to be an effective method of encouraging savings. In light of this, recent initiatives focus on populations that traditionally lack access to a work-based retirement plan.
In 2015, the Virginia General Assembly passed House Bill 1998 (HB 1998), which directed the Virginia Retirement System (VRS) to facilitate a working group to review various options for encouraging private sector retirement savings. As facilitator of the working group, VRS endeavored to consolidate information from various researchers, industry experts, and stakeholders to help inform Virginia’s decision makers.
Recent initiatives to improve retirement savings and access have taken different forms. Among the state-based programs, there are three primary models: 1) an auto-IRA or secure choice plan; 2) a state-sponsored Employee Retirement Income Security Act of 1974 (ERISA) plan; and 3) a marketplace approach. The federal government, in addition to the long-established individual retirement account (IRA) and retirement vehicles established in the Internal Revenue Code, also recently established myRA accounts that allow individuals to save up to $15,000 on a tax-advantaged basis.
This report provides background and other information on retirement trends in the United States and Virginia. In addition, the report examines various state and federal models as options for the Commonwealth. In consideration of options for Virginia, the report evaluates impacts to key stakeholders and outlines potential next steps for encouraging citizens’ participation in retirement savings plans. Finally, the report includes an extensive Appendix containing many resources and other relevant information relating to these programs.
HB 1998 Working Group
As the designated facilitator of the working group pursuant to HB 1998, VRS established a work group made up of state agencies, industry experts, and other interested parties. The work group held meetings to learn more about retirement savings efforts and discuss elements to be included in this report. Although all working group participants had the opportunity to review and contribute to this report, its contents are not necessarily a reflection of any individual participant’s specific views. Instead, this report endeavors to reflect the collective input of the group.
Retirement Savings and Access in Virginia and Across the United States
According to a variety of resources, the average American is not financially prepared for retirement. Whether due to inadequate savings, lack of access, or other factors, Americans generally have not saved enough money to withstand financial obligations during their retirement years. The Federal Reserve estimates that approximately 31 percent of Americans nationwide may not have any retirement savings at all. This includes about 27 percent of those age 60 or older. Other data suggests that, as recently as 2013, the median U.S. household held about $5,000 of savings in a retirement account.
One reason for this trend may be the so-called “coverage gap,” which describes workers who do not have access to an employer-sponsored retirement plan. Although estimates vary, the data suggests that tens of millions of American workers lack access to a retirement plan through their employer for one reason or another. Those without access include part-time workers, full-time workers who are otherwise ineligible for a retirement plan, and the self-employed.
Virginia faces issues similar to those that exist throughout the country. The Pew Charitable Trusts conducted research and found that approximately 55 percent of working Virginians have access to an employer-sponsored retirement plan, while only 44 percent participate in such a plan. An additional factor to consider in Virginia is the extent to which wage earnings may impact retirement savings behaviors. The Pew study noted that throughout most of the Commonwealth, weekly wage earnings are lower than the weighted national average. Because some may consider retirement savings to be a secondary financial priority, and even sometimes a discretionary expenditure, wages may have an impact on issues specific to Virginia.
Regardless of the cause, inadequate retirement planning and funding could impact the citizens of and potentially the Commonwealth as a whole. A path to addressing these potential issues can be complicated and multi-faceted, but there are a number of options designed to address shortfalls in retirement savings available for consideration.
In recent years, one common obstacle impacting states that attempted to tackle these issues was the uncertain application of ERISA provisions across the various government-sponsored approaches. Fortunately, the U.S. Department of Labor recently finalized regulations specifying the application of ERISA provisions on the various models established thus far. Going forward, although assessing the impact of ERISA provisions may still be a consideration for the Commonwealth as it further analyzes various available options, the application of ERISA is now more clearly defined.
In addition to ERISA, there are a number of other legal considerations, such as federal securities laws and prohibited transaction rules. If Virginia wishes to implement an initiative to address private-sector retirement savings, the legal and regulatory framework of any initiative will be a threshold issue. To illustrate, a state needs to determine whether or not it wishes to be an ERISA qualified plan or not and take appropriate steps to remain in compliance with the applicable regulatory framework.
Initiatives at the Federal and State Levels
The federal government has long maintained initiatives to encourage retirement savings and access to retirement savings vehicles. Most of these initiatives take the form of tax-advantaged retirement savings vehicles, such as a 401(k) and IRAs, among others. More recently, other federal initiatives include the Retirement Savings Contributions Credit (i.e., the Saver’s Credit) and the myRA program. In addition, there have been federal budget proposals aimed at encouraging retirement savings and assisting state-based initiatives.
Aside from or as a supplement to implementing a new program, the Commonwealth may wish to consider promoting awareness of these federal incentives so that Virginia’s workers may gain a better understanding of the tools already available. For example, the federal Saver’s Credit appears to be a relatively unknown and underutilized tax credit. Therefore, promoting awareness of the Saver’s Credit may provide some working Virginians the knowledge necessary to take advantage of the credit’s benefits. A similar awareness campaign may aid workers to better understand the benefits of an IRA.
At the state level, there are three primary ways in which governments recently have chosen to help increase retirement plan access and savings for private-sector workers:
• Auto-IRA or Secure Choice plan: a non-ERISA approach that requires employers to offer a retirement plan or automatically enroll employees (subject to opt out) in an IRA;
• State-sponsored ERISA plan: this includes 1) a prototype plan in which the state acts as the central administrator for individually administered ERISA plans, and 2) a single multiple employer plan that covers many different employers; and
• Marketplace approach: the state establishes a central exchange that serves as a one-stop shop for individuals to choose among various existing service providers and plans.
Auto-IRA plans are in various stages of progress in California, Connecticut, Illinois, Oregon and Maryland. Massachusetts has implemented a state-sponsored ERISA plan for non-profit entities. A marketplace approach is in development in Washington and New Jersey. While each of these plans maintain unique components, they generally fall into one of the three broad categories outlined above.
States that have already begun implementing programs are as follows:
• California – The California Secure Choice Retirement Savings Program is a secure choice (i.e., auto-IRA) plan that will fall within the ERISA safe-harbor provisions upon implementation. Generally, employers with five or more employees will be required to participate in the program, which is operated by its own board within the state’s department of treasury.
• Connecticut – The Connecticut Retirement Security Exchange is an auto-IRA plan that will fall within the ERISA safe-harbor provisions upon implementation. Generally, employers with five or more employees that do not currently offer a retirement plan will be required to participate in the plan, which is a political subdivision of the state, operated by its own board.
• Illinois – The Illinois Secure Choice Savings Program is a secure choice (i.e., auto-IRA) plan that will fall within the ERISA safe-harbor provisions upon implementation beginning in 2018. Generally, an employer with 25 or more employees that has not offered a retirement plan within the preceding two years will be required to participate in the program, which is operated by its own board within the state’s department of treasury.
• Maryland – The Maryland Small Business Retirement Savings Program and Trust is an auto-IRA plan that will fall within the ERISA safe-harbor provisions upon implementation. Generally, although there will be a deferral for new businesses and those that offer a retirement plan available on the open market, all employers will be required to participate in the plan, which is an independent agency, operated by its own board.
• Massachusetts – The Massachusetts Retirement Plan for Non-Profits is a prototype plan that is subject to ERISA provisions and already underway. Generally, non-profit employers with 20 or fewer employees have the option to voluntarily participate in the plan, which is operated by the state’s department of treasury.
• New Jersey – The New Jersey Small Business Retirement Marketplace is a marketplace approach that, upon expected implementation in 2017, will provide access to products and services that are governed by ERISA provisions. Generally, an employer with fewer than 100 employees will have the option to voluntarily participate in the marketplace, which is operated by the state’s department of treasury.
• Oregon – The Oregon Retirement Savings Plan is an auto-IRA plan that will fall within the ERISA safe-harbor provisions upon implementation late in 2017. Generally, all employers that do not offer a retirement plan will be required to participate in the plan, which is operated by its own board within the state’s department of treasury.
• Washington – The Washington Small Business Retirement Marketplace is a marketplace approach that, upon implementation in early 2017, will provide access to products and services that are governed by ERISA provisions. Generally, an employer with fewer than 100 employees will have the option to voluntarily participate in the marketplace, which is operated by the state’s department of commerce.
Considerations and Potential Next Steps for Virginia
The HB 1998 work group made a number of observations that the Commonwealth may find useful in its efforts to improve the retirement savings shortfall and coverage gap. A key consideration is the exclusive benefit rule that governs VRS, which may limit its ability to administer a private sector retirement program. Additional consideration should be given to plan design and feasibility. Financial education is also a critical area for attention in evaluating options for the Commonwealth.
Should the Commonwealth wish to move forward, next steps for consideration may include: identifying the appropriate funding source for the selected option; analyzing the impact of federal and state regulations; and determining program administration for the selected plan, including whether an existing state agency will manage the program or if a new entity is required.
In evaluating these options for potential application in Virginia, impacts to stakeholders must be examined. For employers, impacts may include program structure, participation thresholds, responsibilities and liabilities. Similarly, employee impacts may focus on employment coverage types (full time versus part time), enrollment structure, tax effects, contribution requirements, and benefits portability. In addition, the provider and business communities may also serve an important role in the delivery of services to this population. Finally, the Commonwealth will face decisions pertaining to program funding, liability, administration and governance.
Retirement planning and adequate savings are a challenge for many citizens of Virginia, and the United States as a whole. This is especially true for those without access to a workplace-sponsored retirement savings plan. Just as other states are working to address this issue, the Commonwealth may wish to implement a program for those who do not otherwise have access to a retirement savings plan. This report details the various approaches taken by other states as well as additional information for considering the implementation of such plans. Overall, when considering an approach, decision makers must evaluate impacts to employers, employees, other stakeholders and the state. Among these considerations are the funding source, program administration, and federal and state regulations.