State-Run Retirement Plans: Are They A Viable Solution?

State-Run Retirement Plans: Are They A Viable Solution?
Photo by stevepb (Pixabay)

Most people don’t want to work until the day they die, even if they are healthy enough to do so. For many Americans, the tax code offers companies the ability to create 401(k) plans that allow participants to save a portion of their compensation in a tax-deferred environment. Participants have a higher chance of reaching their realistic retirement goals as compared to employees of companies that do not offer a 401(k) plan. However, according to Time, 1-in-3 Americans don’t have anything saved for retirement.

The staple of corporate-sponsored retirement savings is 401(k) plans. Another option – state-run retirement plans – offers some advantages, but faces some daunting obstacles that hinders their widespread acceptance.

Benefits of federally supported retirement plans

More than 78% of all full-time workers have access to a 401(k) plan, and more than half of that percentage routinely contributes a portion of their earnings into these accounts. Of these households, almost three-quarters earn less than $100,000 per year. These statistics demonstrate that the majority of workers with access to a 401(k) plan actually use it for retirement savings, regardless of the level of their annual income and if the tax advantages of doing so are weighted toward low-to-moderate-income households.

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Additionally, there is evidence that millennials who have access to a 401(k) plan are saving more than previous generations. So, the issue of not saving enough for retirement is a generational one that is beginning to correct itself.

In the meantime, however, a large part of the population needs a retirement plan.

Gaps within America’s retirement-savings system

Despite the proven benefits of employer-sponsored retirement accounts, there are still millions of short-service and/or part-time American workers who either do not have access to one or don’t elect to use it if they do have access. The workers without an employer-sponsored account can open an individual retirement account (IRA) on their own, but statistics indicate that less than 5% of these workers actually take that step.

State-based plans as an option?

To fill these gaps, some states are considering offering state-run retirement plans that are similar to 401(k)-type plans except that they are not subject to the Employee Retirement Income Security Act of 1974 (ERISA). While not being subject to ERISA eliminates many of the annual compliance and government filing requirements that apply to 401(k) plans, it also eliminates many of the legal protections that participants enjoy with an ERISA-covered 401(k) plan.

The state-run plans would essentially require employers to offer their employees the ability to defer a portion of their compensation – similar to 401(k) plans. There are no eligibility requirements for employees to participate in the plan, and these plans would not require the company to engage service providers, such as an investment advisor, to create an investment menu and perform employee communications.

One of the primary challenges with state-run programs, however, is that they are already being sold as lower-cost, easier to manage options than traditional 401(k) plans when the reality is that this might not be the case when reviewing the service providers. Some of the early proposals discussed the “all-in” cost per participant may in fact be higher than what is available via a private sector 401(k) plan – even for small employers (when excluding an investment-advisor component).

By Keith Clark, read the full article here.

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