States Aim to Expand Retirement Plan Access

  • March 20, 2017
  • by Sean Elder

Fifty years ago, the Haight-Ashbury district of San Francisco was a mecca for thousands of America’s youth, who flocked to what poet George Sterling called “the cool, grey city of love” to pursue pleasure and, in some cases, duck any number of responsibilities.

Today’s Haight Street is considerably cleaner than it was during the famed “Summer of Love,” although the small businesses that line the street still tend toward vintage clothing shops and tattoo parlors. There’s a good old-fashioned independent bookstore, Booksmith, that reflects the neighborhood ethos with a wall of graphic novels as well as a modern addition: security door scanners to address the Haight’s longtime headache of shoplifting. The store is looking to the future in other ways, too—for its employees.

“When we took over Booksmith in 2007, the store did not have a retirement plan,” says co-owner Christin Evans, who bought the store with her husband, Praveen Madan. “We were looking at the package of employee benefits we were offering and asking ourselves how they compared to other businesses in terms of recruiting talent to the store. We had a lot of young people coming out of colleges and MFA programs, even a couple recently graduated high school students. We had a population that was thinking more about student loans and using their paychecks to get by and thinking less about putting funds toward retirement.”

Booksmith’s employees were not unusual: A Pew analysis of census data last year found that more than a third of U.S. workers don’t have access to either a traditional pension or a 401(k)-type plan from their employers. Not coincidentally, about a third of U.S. workers—some 42 million people—are employed by companies with fewer than 100 workers. Most small businesses can’t afford to offer a retirement plan, and those that can afford it often lack the expertise to set one up without outside assistance.

“We have a big wave, demographically speaking, of people that don’t have enough for the basic needs of retirement like health care, food, and other concerns,” says John Scott, who directs a Pew project researching American retirement savings. “After they retire, they’re probably going to have to go to the government for assistance.” The median amount in retirement savings accounts in this country is $22,000, according to Pew’s research—only $6,000 more than the median annual Social Security benefit.

This state of affairs has drawn the attention of policymakers around the country, many of whom are concerned that state governments could be facing a generation of retirees who will put a new strain on social services.

So in recent years, 31 states have passed or begun considering programs to help people establish individual retirement accounts or find other ways to save. California recently created the Secure Choice Retirement Savings Program, which is about three years from becoming available to workers and is aimed at employees at small businesses such as Booksmith. Workers will be automatically signed up to contribute 2 to 5 percent of their wages toward retirement. They can choose to opt out (there is no mandate to save), and the plan is portable, meaning workers can take their savings with them if they move to another job. Employers will not be required to contribute matching funds; the only burden that Secure Choice places on the employer is ensuring that the business’s payroll service makes the automatic deduction for the employees.

Seven states have passed similar legislation in recent years, with Connecticut, Maryland, Illinois, and Oregon using the same model as California. Advocacy groups such as AARP extol the new opportunities for workers.

“AARP has been very supportive of expanding the opportunity for people to save, and it just so happens that the action is in the states at the moment,” says David John, a senior strategic policy adviser with the organization’s Public Policy Institute. Through his years on panels and in workshops exploring the possibilities of government-sponsored retirement plans, he has gotten an earful from small-business owners across the country.

“Typically, whenever you talk to a businessperson about something new to do, the immediate reaction is to throw up their hands and say: ‘Oh, geez, we already do this and this; why do we have to do this, too?’ One of the very interesting things about the California Secure Choice model, which is based on the automatic IRA, is that the more businesspeople understand the issue and the details, the more supportive they get,” John says. In fact, the business owners say the plans help them recruit and keep a better workforce.    

Retention is an issue for many small businesses. Evans says she and Madan are constantly looking for incentives to get good people to stay at Booksmith. And a plan’s portability is important, too, she says, because many employees eventually leave to write books or work for publishers.

Employer-sponsored retirement plans

Christin Evans, owner of independent bookstore Booksmith in San Francisco, favors new programs that offer retirement benefits to small-business workers. California's Secure Choice will be available to her employees in about three years. (Winnie Wintermeyer for The Pew Charitable Trusts)

Other employers have more immediate concerns about California Secure Choice. “What kind of position is the employer going to be in when the employees maybe paid attention when they were given the information and maybe they didn’t?” says Marti Fisher of the California Chamber of Commerce. “When there will be a deduction in their paycheck, and they don’t understand—how is that all going to play out?”

The chamber was opposed to the initial Secure Choice legislation, which was sponsored by Senate President Pro Tempore Kevin De León of Los Angeles. But Fisher says the chamber worked with the bill’s supporters to secure amendments addressing its concerns about employer liability and administrative burdens and did not oppose the final plan. Chambers in other states often continue to oppose the plans because they perceive them as a burden on business.

Pew’s research has found that the majority of owners of businesses with fewer than 250 employees support some kind of automatic retirement savings plan for their workers—as long as it doesn’t create new work for them.

“These employers want to know how much of a burden these state plans are going to be on their business,” says Scott. “So in developing these programs, the states should be thinking about how those burdens can be minimized. Can states reduce the paperwork and take on more of the communication and education so business owners aren’t wearing three hats and can focus instead on their businesses without worrying about having to do more administrative work?”

The financial services industry also frequently opposes the plans, concerned that the programs could harm its business. But proponents noted that the workers being targeted by the law constitute a new market. AARP’s John points to Britain’s National Employment Savings Trust—created by similar legislation in 2008—which he says has been “spectacularly successful. … Financial services businesses that initially thought this was going to be a problem recognized that this was an unparalleled opportunity.”

The percentage to be deducted from each employee’s paycheck is one of the devilish details to be settled over the next three years as the California plan is rolled out. Other options also haven’t been decided, such as how much investment risk the funds will have.

An estimated 6 million California workers, or about half the state’s private sector workforce, don’t have access to an employer-sponsored retirement plan. In smaller states, the needs are just as daunting. To the north in Oregon, about 36 percent of workers don’t have access to an employer-sponsored plan. The new Oregon Retirement Savings Plan is similar to California’s approach and is slowly being rolled out, beginning in July. It’s already attracting attention from small-business owners, such as liquor store owner Saleem Noorani, and their workers.

Noorani owns two small stores, both called the Cork & Bottle Shoppe: one in Springfield and the other in Corvallis, home to Oregon State University. He has nine employees in the two locations, most of them part time, and joined the law’s rules advisory committee as a small-business owner to help ensure that the plan had minimum negative impact on other small businesses.

“We do all our payroll in-house,” says Noorani. “Any retirement savings plan is just another line item. I wanted to make sure for any small-business employer that this is as easy as it possibly can be.” He says that most small-business owners use simple payroll computer programs and that adding retirement deductions should be easy. “From then on it’s automatic—they won’t even see it.”

Noorani says his state’s sponsored retirement savings plan is a great benefit for workers. “We all know just relying on Social Security as a vehicle for retirement income is not enough,” he says. “It was never designed to be and is never going to be. More than half the people working in America do not have access to either a 401(k) or some vehicle of saving for retirement. A plan like this, where the state is saying, ‘Hey, all you small-business owners: We will ta­ke on the responsibility and management, and you don’t have to fund-match.’ I think that is a big concern also for business owners who are barely making ends meet.”

He has spoken to his staff about the plan. “Most people in their 20s don’t think beyond a week,” says Noorani. “By the time you are in your 40s or 50s and you start stressing over your retirement, it’s a little too late.”

Otto Deurloo-Willard, 31, manages Noorani’s Springfield store, where he began working after managing a movie theater for 10 years. “I had a 401(k) with the company,” he says. “I wasn’t really informed about its purpose or function. When I stopped working for them, I cashed it out without realizing what I was doing. … Other than the fact that they were taking money out of my paycheck, I didn’t know much about what they were doing. I didn’t know the consequences of closing it out early or the fact that I could potentially roll it over.”

The Eugene native has tried to save since, a goal that has only become more important: He is newly married and his wife has been unemployed for most of the past year while she took care of her father. “I’ve been living paycheck to paycheck pretty much my whole adult life,” he says, adding that the Oregon Retirement Savings Plan is “fantastic.”

“I believe my business is run on my employees,” says Noorani. “My business is all about customer service. If you have customer service, you will retain and gain customers; if you don’t have good customer service, you lose customers. Customer service is provided by my staff, and if I have a happy, satisfied staff, that translates automatically. People come into the store, and they feel that vibe.”

Booksmith’s Evans echoes Noorani, saying small businesses have a different relationship to their employees than larger ones. The new programs offering retirement benefits are a chance to nurture that relationship and help workers plan for their futures. “Small-business owners,” she says, “see a responsibility to helping them achieve longer-term goals.”