HD12 - Report on State-Facilitated Private Retirement Plan Programs: Encouraging Citizens to Save for Retirement (Chapter 506, 2020)
This final report (Virginia529 Report) represents a collection of findings and recommendations based on nine months of study, research, coordination and collaboration among the Virginia College Savings Plan (Virginia529) team, key subject matter expert partners, public and private sector stakeholders, employer associations, employers and employees across the Commonwealth, academic institutions and retirement savings program directors from across the United States. The Virginia529 Report provides a summary of the landscape relating to efforts to increase participation in retirement savings programs nationwide, including existing federal tax-advantaged retirement savings options as well as the various state-facilitated models examined and adopted by states across the country over the last dozen years.
The scope of the study includes each of the components outlined in Chapter 506 of the 2020 Virginia Acts of Assembly, adopted March 27, 2020, which fall into three major lines of effort: (i) a market survey; (ii) a financial feasibility and cost analysis; and (iii) program structure and implementation options. Virginia529’s intent in delivering this report is to provide a well-researched, actionable document that builds upon the outstanding work of prior studies conducted for the Virginia General Assembly by the Virginia Retirement System Work Group (the VRS Report) and by Christopher Newport University (the CNU Report). This comprehensive and holistic approach also includes data and research to inform the legislature on the trajectory of retirement insecurity in Virginia and the implications for the economic health of the Commonwealth and Virginians now and in the future. If it is the will of the legislature to move forward with a state-facilitated private retirement program in Virginia, this Report may serve as a foundation to a successful launch.
The Virginia529 Report, as well as the VRS Report and the CNU Report, arise out of the legislature’s recognition that many employed Virginians lack sufficient retirement savings. Although most Americans access retirement savings options through their employers, approximately 45% of the Commonwealth’s workforce--approximately1.2 million employees--does not have access to a retirement savings plan at work. This lack of access disproportionately affects Hispanic, Black, and Asian employees who experience lower rates of access to, and participation in, retirement plans than white employees generally do. Women generally have lower overall access and participation rates than men when looking at all employees.
Many factors help explain both why employers do not offer retirement plans to employees and why employees too often approach retirement age with no retirement plan or savings. The single largest impediment to employees saving for retirement appears to be lack of access to a plan at work. Other factors, as discussed in Chapter 3 of this Report, include perceived affordability, complexity of the retirement planning process for both employers and employees and a lack of financial education and understanding sufficient to allow individuals to be successful in planning and preparing for retirement.
Private market solutions exist which individuals may pursue without going through their employer; however, the fact of the matter is that without access to a retirement savings plan at work, most employees do not save for retirement on their own. In fact, fewer than 15% of employed Americans save for retirement outside of work. Even though financial education and improved financial outcomes do appear to be linked, financial education alone does not appear to drive meaningful changes in savings levels.
The lack of sufficient retirement savings has a clear negative impact not only on individual households ill-equipped to maintain their standard of living into retirement, but also on the Commonwealth and its fiscal and economic health. With a significant portion of the retired population having insufficient retirement savings, social benefits programs will continue to expand to meet increased need.
The fiscal impact of under-saving is significant and estimated at an additional cost of $11.8 billion to Virginia taxpayers over the next 15 years. While these downstream impacts are concerning, proactively addressing the issue of insufficient retirement savings may go a long way towards reducing that extra spending burden on the Commonwealth. Chapter 4 provides an analysis conducted by Econsult Solutions, Inc. which concludes that the average Virginia household with less than $75,000 in annual income could close the retirement savings gap anticipated by 2035 by contributing an additional $1,930 annually over each working year.
Although the high level of retirement insecurity in Virginia is troubling, there are ways to help ameliorate the problem. In analyzing the issue, the VRS Report stated at page 28 that “[i]n order to change retirement insecurity, industry experts contend that stakeholders must meet potential savers where they are by using the tools learned through behavioral economics. This includes access to payroll deduction plans, automatic enrollment and escalation, easy to understand plans and choices, and the ability to convert funds into lifetime income streams."2 Facilitating access to retirement savings options in the Commonwealth is key to addressing the retirement savings gap and securing the Commonwealth’s fiscal position as well as enhancing the quality of life for individual citizens in their retirement years.
Many states have found that state-facilitated retirement savings programs appear to offer the best opportunity to expand retirement coverage and savings. Typical savings levels in today’s existing programs align with the level of annual retirement savings required to significantly improve retirement outcomes for employees and the Commonwealth’s fiscal outlook. A state-facilitated private retirement program could provide a viable mitigation strategy to address the issue of inadequate retirement savings.
The following five pages present key takeaways and recommendations of Virginia529 with respect to each line of effort. Detailed analysis and key findings for each of the five study components is provided in the following chapters and underpins the recommendations outlined below.
Line of Effort #1 - Market Survey and Analysis
The market survey examined the level of interest of Virginia employers in participating in a state-sponsored private retirement option. In addition, more than 950 employees across the Commonwealth participated in a survey to render a comprehensive and holistic perspective of sentiments towards retirement savings options.
1. Small business employers and employees across the Commonwealth strongly support the concept of a private retirement savings program facilitated by the state, which they view as a trusted entity.
2. In Virginia, the general profile of employers who do not offer employer-sponsored retirement plans generally consists of small business owners with fewer than 10 employees and, generally speaking, employers who are more likely to be members of the construction, retail, healthcare and non-retail services industries across Virginia.
3. In Virginia, the profile of surveyed employees not covered by a retirement plan generally consists of employees between 18 and 54 years of age, nearly a third represent minority populations including Black, Asian and Hispanic employees and 53.5% of employees are likely to be members of the construction, healthcare, retail, hospitality and food service and other non-retail services industries.
4. Employer barriers to offering a retirement plan include: (i) lack of resources to administer a retirement plan (especially among businesses with fewer than 10 full-time employees); (ii) relative high cost to establish plans; and (iii) choosing to focus on other employee benefits.
5. In both the Commonwealth and nationally, employees generally like the concept of an auto-IRA program with automatic enrollment (including the choice to opt-out) and automatic escalation of contributions.
6. Virginians generally trust the state to perform responsibly, particularly as it relates to fiduciary responsibilities and investment management.
7. Based on market survey and experiential data, the participation rate of a state-facilitated auto-IRA plan is anticipated at 60-75%.
Recommendations and Policy Considerations.
1. A state-facilitated, auto-IRA program is the model which has shown itself to be significantly more effective than the alternatives in driving saving behaviors. The auto-IRA model minimizes barriers to employers while maximizing program features to best serve employees. An auto-IRA program is the recommended model for Virginia should the General Assembly consider authorizing creation of a state-facilitated private retirement program. (Key Findings 2-2; 2-3; 2-4; 2-5; 2-6; 3-3; 3-4; 3-5; 3-6; 3-7; 3-8; 3-11; 4-5; 4-7; 7-1)
2. Program features should include: (i) emergency savings set-aside option for employees; (ii) auto-enrollment of all eligible employees with ability to opt-out; (iii) auto-escalation of contributions with the ability to change contribution levels at any time; and (iv) required participation for employers with five employees or greater and voluntary participation for individuals who wish to participate. (Key Findings 3-3;3-4; 3-6; 3-7; 3-8; 3-9; 5-2; 5-4; 5-5; 5-7; 7-1; 7-2)
Line of Effort #2 - Financial Feasibility and Cost Analysis
This component of the study examined the likely costs to start up different types of state-facilitated private retirement programs, an estimate of time to reach self-sufficiency for each model and potential funding options. In addition to the mandated scope, the Virginia529 Report includes an analysis of the impact of insufficient retirement savings on the Commonwealth.
1. The CNU Report estimated startup costs for both an auto-IRA and MEP at $2 million. All-in operating costs for an auto-IRA were estimated between $6.5 million and $18 million; this estimate increased to between $17 million and $36 million for a MEP. It should be noted that all-in operating costs are over a period of years not specified in the CNU Report. Estimates for time until the program is cash-flow positive ranged from 6-7 years for an auto-IRA and 5-10 years for a MEP, depending on economic conditions in Virginia.
2. More current estimates based on data from other states, with similar size and scope, approximate a cost to the Commonwealth of $1,290,000 for startup and approximately $1,240,000 for annual operating costs with a Virginia auto-IRA model. Revenue from program fees over time are expected to will cover these costs for the state.
3. A larger portion of program responsibilities may be outsourced in a MEP program than in an auto-IRA plan and the startup costs may be lower with a MEP. However, given the insufficiency of current data available to appropriately refresh the CNU Report estimates, Virginia29 has assumed startup costs for a MEP to be similar to an auto-IRA: $1,290,000 for startup and approximate annual operating costs of $895,000. The lower annual operating cost model estimates the reality that MEP programs are generally cheaper for a state to administer since employers will likely pay a portion of the operating costs. Revenue from program fees over time are expected cover these costs for the state.
4. Based on slower-than-projected implementation and participation rates than initially modeled in states with active programs, Virginia529 estimates financial feasibility of an auto-IRA to be achieved within 10 years. With only one active MEP program, scant market data and generally low participation rates, it is difficult to predict with certainty, financial feasibility of a MEP.
5. Auto-enrollment plays a key role in encouraging a habit of saving and driving program asset accumulation. As a MEP program option is voluntary for employers, it is unlikely that employee participation will achieve critical mass to achieve a self-sustaining program within a reasonable timeframe.
6. Under an auto-IRA program, employers perform a light ministerial function during initial registration after which the program administrator manages communication with the employee. Under a MEP, employers are typically responsible for a number of costs, including: (i) startup costs; (ii) annual recordkeeping and administrative costs; (iii) annual audit costs for employers with more than 120 eligible employees; and (iv) costs to perform administrative and fiduciary duties internally.
Recommendations and Policy Considerations.
1. A mandatory auto-IRA model with broad access to employers of all sizes which do not offer a retirement option for employees is the most financially feasible model to encourage Virginians to save for retirement. (Key Findings 2-3; 2-6; 3-9; 3-11; 5-2; 5-3; 5-4; 5-5; 5-7; 6-2; 7-1)
2. Certain features should be included in a program, and the table below summarizes key recommendations for program adoption. (Key Findings 2-3; 2-6; 2-7; 3-3; 3-6; 3-7; 3-8; 3-9; 7-1; 7-2)
3. If the General Assembly authorizes a state-facilitated private retirement program, this Report recommends that the General Assembly consider authorizing an interest-free Treasury loan to resource program startup and operating costs with the goal of achieving cash-flow positivity within 10 years. (Key Findings 2-3; 5-2; 5-3; 5-4; 5-5; 5-6; 5-7; 7-3)
Line of Effort #3 – Program Structure and Implementation Options
In looking at optimum program structure and implementation options, the Virginia529 Report examined the experience of other states that have implemented or are implementing a state-sponsored private retirement solution for employers and employees and the state agency and structures used to implement the solution.
1. States which have implemented a state-facilitated retirement savings program have generally contracted with a program manager and recordkeeper to run the day-to-day operations of the program with the state serving as sponsor. A state sponsor can enhance outreach and marketing efforts which are critical to ensuring the success of a program. A state sponsor can also leverage relationships with other state agencies to facilitate program administration and oversight.
2. Potential Virginia state sponsors evaluated in this analysis include the Virginia Retirement System (VRS), Department of the Treasury, Virginia College Savings Plan (Virginia529), Department of Accounts, and Virginia Employment Commission. All agencies have varying degrees of marketing and outreach capacity, customer service and support functions, in-house auditing, legal, and compliance support, and interface with the public. Some have more robust existing capabilities than others but, generally speaking, each of the five entities examined could oversee a state-facilitated retirement savings program provided they receive sufficient funding and time to implement.
3. Key discriminators in evaluating a state sponsor include: (i) experience providing a defined benefit and/or defined contribution savings plan to private and/or public savers; (ii) experience working with program administrators, payroll deduction transactions, and recordkeepers; (iii) experience in outreach and marketing to the general public; and (iv) in-house investment management expertise.
4. Except for the significant impediments described immediately below, based on functional requirements and an analysis of alternatives, VRS is the agency best-suited to develop and implement a state-facilitated private retirement program in Virginia, should the Executive branch and General Assembly decide to authorize such a program. Significant impediments may exist, however, and would need to be addressed should the legislature decide to move forward with VRS as the state sponsor. VRS is governed, in part, by a Virginia constitutional provision and the IRS exclusive benefit rule, limiting the population it can serve. Absent significant institutional changes or a constitutional amendment, this limitation likely precludes its selection as a program sponsor.
5. Should the General Assembly wish to consider another potential state sponsor, given that many other state-facilitated programs mirror the institutional setup of those states’ 529 plans, it may be worth examining Virginia529 as a state sponsor. Virginia529 has experience with both defined benefit and defined contribution plans (which includes target date funds) for individual savers and currently offers qualified tuition and savings programs under IRC § 529 and IRC § 529A. Virginia529 also has experience with outreach and marketing to the general public and has established relationships with the other states implementing these programs as well as the Virginia agencies likely to be involved in outreach to Virginia employers.
Recommendations and Policy Considerations
1. If the General Assembly authorizes a state-facilitated private retirement program, this Report recommends the legislature leverage an existing state agency board, or authorize the creation of a new board, to provide program management and oversight of a program. (Key Findings 2-10; 6-1; 6-3; 7-4)
2. If the General Assembly authorizes a state-facilitated private retirement program, a state sponsor to implement a program will need to be designated. VRS and Virginia529 maintain the most experience in this market though there may be utility to establishing a new agency. (Key Findings 2-10; 3-6; 3-7; 3-8; 3-9; 3-11; 5-4; 5-5; 6-1; 6-2; 6-3; 6-4; 6-5; 6-6; 6-7; 6-8; 7-5)
3. If the General Assembly authorizes the launch of an auto-IRA program, this Report recommends bringing various employer groups into the program in phases. One approach would be based on employer size, starting with the largest employers and working towards the smallest at the end of the rollout period. Chapter 7 proposes a phased implementation approach to facilitate a smooth transition while affording training of program staff and employers as needed. (Key Findings 2-7; 6-3; 6-4; 7-6)
4. Financial literacy and education are key components to begin closing the retirement savings gap. If the General Assembly authorizes the launch of an auto-IRA program, a financial education component should be included to provide financial education to private citizens and support in retirement planning. Enabling legislation should provide flexibility and discretion to determine how to best deliver these financial education services and make other implementation decisions. (Key Findings 1-4; 2-2; 2-7; 2-10; 2-12; 6-8; 7-7)