How state governments can help small businesses and their employees overcome barriers to starting retirement plans

State government has an interest in supporting citizens saving for retirement; what’s more, the infrastructure to retirement investment much simpler for small and medium sized businesses and for employees is already in place, via the experience of running public retirement systems and existing mechanisms used to invest millions of public sector pension dollars.

The first barrier to retirement savings – complexity – can be overcome by designing a program to support employers and workers that are new to investing for retirement. Employers need a plan that is very easy to start up, and beginning investors need a few basic, distinct, and easy to understand investment options – preferably combined with automatic payroll deduction. Such a program would dramatically increase the number of workers saving for retirement.

The second barrier – high and hidden fees and costs – can be addressed by creating a retirement investment program that offers low-fees, clearly and honestly declared. Overall costs can be minimized through structural features such as simple start-up process, automatic enrollment, and payroll deduction. Limited investment choices that reduce plan changes and resulting transaction costs have the added benefit of reducing complexity.

A “Universal Voluntary Retirement Account” (UVRA) program can promote future retirees’ economic security by enabling all workers, including and especially low- and moderate- income workers or workers employed by small businesses, to save for retirement at their workplace.

Such a system would need to be separate from those for public employees, but they could operate in parallel, using similar criteria and management mechanisms. The accounts could be created through a new system within state government, or by contracting out to the private sector. In either case, the program can be designed to meet the needs of employers and workers in a specific state.

One possible design is a defined contribution plan with a pre-selected menu of investment options, tax-deferred payroll deductions, and retirement account portability between jobs. A two-tier system might have:

  1. Workplace based individual retirement accounts open to all workers; and
  2. A deferred compensation 401(k) or SIMPLE IRA-type program open to all employers who choose to participate for their employees.

There are several key components from which an UVRA program can be built. For each state the type of investment vehicles, the state role, and the features of the program may differ substantially. Possible features include: automatic enrollment, default investments, payroll deduction, pre-tax contributions, job portability, and low fees.

In Washington State, the legislature funded the design of an UVRA program called Washington Voluntary Accounts. If enacted, it will enable all workers to put aside pre-tax dollars through payroll deductions into an investment portfolio vetted by the state.

Washington Voluntary Accounts will be completely voluntary for workers and portable between different places of employment within the state. The program will also enable small business owners who lack the resources to research and establish their own retirement savings plans to provide a retirement plan for their workers – with all the economies of scale that large corporations currently enjoy. The result will be the creation of substantial assets to supplement future income, enabling workers to live with financial independence after retirement.

So what, specifically, should go into designing a Universal Voluntary Retirement Account?

Next: Designing a Universal Voluntary Retirement Accounts program

Note: This is the third in a four-part series based on EOI’s report Stronger Nests, Bigger Eggs. View part 1 here, part 2 here.

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