States are developing and implementing innovative new ways to help workers begin to save for retirement. (Photo credit: Getty)Getty
Luke Huffstutter, the owner of Annastasia Salon in Portland, Oregon, has 37 employees and had been looking for a retirement savings solution for them for years. He explored various options, including a traditional 401(k), and found that the fees were too high and the complexity too great. He was beginning to think he might not be able to offer his employees a benefit he felt was important for their futures.
Then Luke heard about OregonSaves, a new state-facilitated program to make saving for retirement simple and convenient for employers and employees alike. He realized that he had finally found the answer he had been seeking; by making saving for retirement “fun and easy,” OregonSaves was successful in getting his employees to begin to save for retirement.
The concept of OregonSaves is simple. Employers join the program and their employees are automatically enrolled unless they choose to opt out. In Luke’s case, the only employees who opted out did so because they already participated in another retirement savings program. Now all of his employees are saving instead of just a few. That’s pretty consistent with the statewide results, which show that three out of every four workers eligible to enroll in OregonSaves through their employer do so.
In just a few months, Luke’s employees have saved $67,000 for retirement through OregonSaves. On average, OregonSaves participants set aside about $100 per month to help grow their retirement nest eggs, with $11 million already saved through the program in its first year.
This innovative approach in Oregon is not unique. Nine other states and the city of Seattle have begun to address the retirement savings crisis directly with their own programs. Lawmakers in these states have come together to establish new retirement options that make saving easier.
The outlines of all of these programs are fairly similar. They minimize the burden on employers, positioning employers as facilitators rather than administrators. According to the AARP, workers are 15 times more likely to save if they are offered the opportunity to save through an employer-provided program. In addition to offering a workplace savings option, the use of opt-out automated enrollment increases even more the probability a worker will begin to save and keep saving.
The reality is there is an estimated $4 trillion gap between what Americans need and what they will have for income in retirement. More than half of the private sector workforce — approximately 55 million Americans — lack access to employer-sponsored programs, often due to the challenges of cost and complexity that business owners like Luke Huffstutter faced before he had access to OregonSaves.
Just three of these states — California, Illinois, and Oregon — have more than 10 million private sector workers without access to an employer-sponsored retirement savings plan. These new state-facilitated programs will now offer those workers the opportunity to save.
The savings are directed into well-established retirement accounts like the Roth IRA. They don’t reinvent the wheel, but instead take advantage of the existing infrastructure to quickly create more convenient options for workers.
Building statewide retirement savings solutions like these doesn’t just make things easier. It also creates critical mass that keeps cost low for employees. That means that more money goes to investing in the future instead of administrative fees.
Most workers now participating in the state-facilitated programs were not saving anything for retirement before. As Luke Huffstutter understood when he looked for options on his own for his workers, many of the small businesses and low- to moderate-income workers who will benefit from these state-facilitated savings programs were not seen as worth the time to financial advisors. He believes OregonSaves serves a vital need because it closes the access gap by providing the tools to make it easier to save for retirement.
In fact, these state-facilitated retirement savings programs also are pushing the private sector to develop new, lower-cost products. As Luke knows, if the private sector can offer him something better in the future, OregonSaves gives him the freedom to switch to a privately administered plan as his business grows.
OregonSaves, and other programs like it, will help improve the quality of life for future retirees, while relieving pressure from already-challenged state budgets that share the burden of an aging population with insufficient retirement income. To put those costs in perspective, the state of Pennsylvania recently estimated that it spent more than $4.2 billion on state assistance costs for elderly residents in 2015, of which $702 million of that amount is attributed to insufficient savings, and that number is projected to grow to $6.2 billion by 2030, of which $1.12 billion of that amount will be due to retirees with insufficient retirement income. Add that up and the total cumulative additional cost of state assistance due to insufficient retirement savings between 2015-2030 is projected to be $14.3 billion. And that’s just one state.
Improving retirement security in the years ahead will require strong bipartisan collaboration among policymakers, the financial industry, private sector employers, and individuals. While there is still much to be done, states have refused to wait any longer and are taking the lead in developing and implementing innovative new solutions. The results already have started to show because millions of Americans now have access to simpler, easier, lower-cost ways to save for retirement.