Delaware last week became the latest state to enact a state-run retirement program for workers at companies that don’t offer a 401(k) or similar workplace plan. Delaware EARNS (Expanding Access for Retirement and Necessary Savings) requires businesses with more than five employees that don’t currently offer a retirement plan to participate through a simple payroll process.
“We’ve worked long and hard to make this program a reality for Delawareans who lack access to an employer-sponsored retirement program,” state Treasurer Colleen Davis said in a statement. Her office will hire an executive director to guide the operation of the program and work with a board that was established by the legislation to oversee the initial design and implementation of the program.
The state will join 15 other states and two cities that either already have launched similar programs or plan to do so. So far, workers have amassed more than $500 million through these state-administered retirement-savings options, according to Georgetown University’s Center for Retirement Initiatives.
“This milestone of more than half a billion dollars and more than a half-million funded savings accounts demonstrates that these programs are meeting a long unmet need,” says Executive Director Angela Antonelli. “Workers want to save and will save when it’s made easy for them and offered through their employers.”
An estimated 57 million workers have no retirement plan available through their job, according to the center’s research. Although there are some differences among state initiatives, most involve automatically enrolling employees in a Roth IRA through a payroll deduction starting around 3% or 5%, unless a worker opts out. There is no cost to employers, and an investment company manages the account. States may exclude small companies, such as those with five or fewer employees, from participating in the program.
Contributions to Roth accounts are not tax-deductible as they are with 401(k) plans or similar workplace options. Traditional IRAs, whose contributions may be tax-deductible, might be available as an alternative option in some states, depending on the specifics of the program.
However, Roth IRAs, unlike traditional IRAs or 401(k) plans, also carry no penalty if participants withdraw their contributions before age 59½. To withdraw earnings early, however, there could be a tax or penalty, depending on the circumstances. Additionally, these Roth accounts generally don’t have an employer match on work contributions, as 401(k)s often do.
Virginia created a similar program in June: RetirePath Virginia will open by July 1, 2023. “Almost half of Virginia workers do not have access to a retirement savings plan through their employer,” says Virginia529 CEO Mary Morris. “RetirePath Virginia is an innovative solution to address the commonwealth’s growing retirement savings divide. The program is a logical expansion of the Virginia529 mission, boosting access and promoting financial wellness to even more Virginians.”
Vestwell, in partnership with BNY Mellon, will provide recordkeeping, custodial services and customer support to participating employers and employees. Vestwell also administers state-facilitated retirement savings programs in Oregon and Connecticut, as well as programs in development in Maryland, Colorado and New Mexico.
“Monumental shift” in retirement industry
“There’s a monumental shift happening in the retirement industry,” says Aaron Schumm, founder and CEO of Vestwell. “We’re seeing more and more states playing a central role in closing the retirement savings gap across the country. We’re proud to partner with states like Virginia who are pioneering the way small businesses and their employees will achieve a secure financial future.”
Since 2012, at least 46 states have taken action to implement a retirement savings program for uncovered workers, consider legislation to launch one or study their options, according to the Center for Retirement Initiatives. Oregon was the first state in the country to launch a program, called OregonSaves. By the end of 2020, just three years after launching, Oregon registered more than 16,000 employers, with close to 90,000 total funded accounts and more than $80 million in assets under management.
Although large employers are more likely to offer a retirement plan, administrative burdens or costs can stand in the way of small business owners setting up one. This is why these state-run programs can increase access to a workplace plan for those workers.
“Small businesses want to offer their workers a way to save for retirement, especially now in a competitive job market, and the state programs are making this possible,” Antonelli says.