HD7 - Feasibility Study of Retirement Savings Programs for Virginia (HJR 103, 2018)
The goal of this study is to assess the potential market size, start-up cost, continued running costs, and point at which a voluntary multiple employer retirement savings plan for the Commonwealth of Virginia will become self-sustaining. Previous research(*4) shows that Virginia could save as much as $326 million on public assistance programs through 2030 if lower income retirees increase their net worth in retirement by 10%. In order to achieve this, a voluntary retirement savings program must achieve several goals:
1) An easily accessible multiple employer retirement savings program must be available;
2) A significant percentage of eligible workers must choose to participate in the program and remain enrolled over time;
3) Enrolled workers must contribute enough to meet a significant portion of their retirement income needs and to build enough assets to make the program financially feasible for the Commonwealth to operate; and
4) Virginia employers must be able to comply with the program’s requirements without incurring significant costs.
A summary of the report and its main findings is below.
1. Estimating Market Size: Over half (53%) of all employees in Virginia lack a retirement plan. Of this percentage, the vast majority (84%) do not have a retirement plan because their employer does not offer one. A smaller number work for an employer that offers a plan, but are not included in the plan, and an even smaller number are self-employed without a plan. The vast majority of uncovered workers are in the three big metro areas of Virginia: Northern Virginia, Hampton Roads, and Richmond. Over half (58%) of all firms that do not offer a retirement plan employ less than 100 workers, while 27% of firms that do not offer a retirement plan employ more than 1,000 workers. Three industry groups account for over a third of all firms that do not offer a retirement plan to workers: healthcare and social assistance (14%), retail trade (12%), and accommodations and food services (12%). Nearly three-fourths (70%) of workers who work for an employer that does not offer a retirement plan work 40 or more hours per week.
2. Estimating New Enrollment and Enrollment Persistence: With the implementation of an auto-enroll multiple employer retirement savings plan an estimated 1,168,356 employees would be enrolled, and with an estimated 20% voluntary opt-out rate and estimated 934,684 would remain enrolled.
3. Estimated Start-up Costs: It is estimated that the cost to a start a multiple employer retirement savings plan in Virginia would be in the range of $2 million. Following the example of other states that have considered voluntary retirement savings programs, these start-up costs would be expected to be paid back to the Commonwealth at the point at which the program becomes self-sustaining.
4. Estimated Cost to do Request-For-Proposals: The cost for RFP will depend on which state agency is tasked with this responsibility. We estimate the cost of to hire an outside consultant to be $71,592.
5. Estimated Ongoing Operating Costs: Assuming the ongoing operating costs are divided as: 10% to investment firms, 10% to the state agency overseeing program, and 80% for the cost of the record keeper, we estimate the annual ongoing operating costs for the first 5 years while the program works toward financial self-sufficiency to be between $3.4 million and $7.2 million per year.
6. Estimates on Administrative Costs to Employer: There is a list of responsibilities that employers could be tasked with, including: introducing the program to employees, providing data to enroll employees automatically into the program, collecting opt-out decisions from employees, processing and funding payroll auto-deductions, basic record-keeping, and resolving errors/issues.
7. Projected Timeline to Financial Self-Sufficiency: MEP: Based upon two scenarios, one generally for employees making over $25,000 per year and a stable economic outlook (the best outlook) and the other generally for employees making less than $25,000 and a poor economic outlook (the worst outlook), we estimate the two extremes of financial self-sufficiency. For the first scenario, financial self-sufficiency would be achieved between year 5 and year 6, depending upon the enrollment strategy pursued. For the second scenario, financial self-sufficiency would be achieved between year 9 and year 10 depending upon the enrollment strategy pursued.
8. Projected Timeline to Financial Self-Sufficiency: IRA: Based upon two types of IRA programs, the Traditional and the Roth, we estimate the Traditional program will reach running profitability in year 6 and the Roth program will reach running profitability in year 7. The difference in profitability is driven by the income contribution limits of the Roth program.