Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage

Posted: 31 Mar 2016

See all articles by Kimberley Granger

Kimberley Granger

Government Accountability Office (GAO)

Sharon Hermes

Government Accountability Office (GAO)

Charles A. Jeszeck

Government Accountability Office (GAO)

Jessica Moscovitch

Government Accountability Office (GAO)

Melinda Bowman

Government Accountability Office (GAO)

Grant Mallie

Government Accountability Office (GAO)

Douglas M. Sloane

Independent; Government Accountability Office (GAO)

Walter Vance

Government Accountability Office (GAO)

Seyda Wentworth

Government Accountability Office (GAO)

Gustavo Fernandez

Government Accountability Office (GAO)

Date Written: September 10, 2015

Abstract

About half of private sector workers in the United States — especially those who are low-income or employed by small firms — lack coverage from a workplace retirement savings program primarily because they do not have access. According to GAO's analysis of 2012 Survey of Income and Program Participation (SIPP) data, about 45 percent of private sector U.S. workers participated in a workplace retirement savings program — an estimate that is consistent with prior GAO work and other research. Using tax data to correct for under-reporting raised the share of workers participating to 54 percent, but still indicates many workers lack coverage. Among those not participating, the vast majority — 84 percent — lacked access because they either worked for employers that did not offer programs or were not eligible for the programs that were offered, for example, because they were new employees or in specific jobs that were excluded from the program. In particular, lower-income workers and those employed by smaller firms were much less likely to have access to programs. However, among those who had access, the majority of these workers participated.

Key strategies to expand private sector coverage identified in the states and countries GAO reviewed include encouraging or requiring workplace access, automatic enrollment, financial incentives, and program simplification. For example, pending implementation, programs in two of the states GAO studied — California and Illinois — would require certain employers to automatically enroll workers in a state-run program, though workers could choose to opt-out. In the countries GAO studied, combining workplace access with automatic enrollment and financial incentives — tax preferences or employer contributions — has helped increase participation. Moreover, states and countries have tried to simplify program designs to (1) limit the responsibility and cost for employers and (2) reduce complexity, cost, and risk for workers. For example, some states intend to not only reduce burdens for employers by selecting and monitoring providers, but also reduce complexity for workers by limiting the number of investment options.

State and national stakeholders reported potential challenges with uncertainty created by the Employee Retirement Income Security Act of 1974 (ERISA) and agency regulations that could delay or deter state efforts to expand coverage. Generally, ERISA preempts, or invalidates, any state law relating to “employee benefit plans” for private sector workers, but different areas of uncertainty arise based on the details of each state effort. For example, four of the six states GAO reviewed intend to create payroll deduction individual retirement account (IRA) programs that would not be considered employee benefit plans. However, due to uncertainty created by ERISA, it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans. Stakeholders also noted uncertainty caused by regulations from the Departments of Labor (DOL) and the Treasury meant to assist workers and employers. For example, DOL's regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty. Given these uncertainties, states may face litigation and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.

Keywords: retirement, retirement savings, state retirement plan, retirement coverage

JEL Classification: J32, J38, K3, H75, H5, H7

Suggested Citation

Granger, Kimberley and Hermes, Sharon and Jeszeck, Charles A. and Moscovitch, Jessica and Bowman, Melinda and Mallie, Grant and Sloane, Douglas M. and Vance, Walter and Wentworth, Seyda and Fernandez, Gustavo, Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage (September 10, 2015). Available at SSRN: https://ssrn.com/abstract=2756092

Kimberley Granger (Contact Author)

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Sharon Hermes

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Charles A. Jeszeck

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Jessica Moscovitch

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Melinda Bowman

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Grant Mallie

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Douglas M. Sloane

Independent ( email )

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Walter Vance

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Seyda Wentworth

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

Gustavo Fernandez

Government Accountability Office (GAO) ( email )

441 G St., NW
Washington, DC 20548
United States

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