When Kristi Kono started working eight years ago as a stylist at the Annastasia Salon in Portland, Oregon, she knew she’d be on her own saving for retirement. Savings plans aren’t something small businesses in the service industry typically offer employees.
But saving became a little easier for Kono, 50, last summer when Oregon started testing its state-run retirement plan: OregonSaves, created in 2015. The program automatically enrolls Oregon workers into a “Roth IRA,” which they can opt out of at any time, if their employer doesn’t offer a retirement plan.
Kono and other early adopters pay a fee of 1 percent of the total amount invested, cheaper than other plans available from investment managers and without a minimum account balance. In return they get a professionally managed investment account that will grow as they age.
Once they hit their retirement years, they can withdraw the accumulated savings tax free. Employers or the state can’t match employee contributions like they would in a more comprehensive retirement plan. But for Kono, OregonSaves is a welcome benefit; she now automatically deposits 10 percent of every after-tax paycheck into her OregonSaves account.
“I don’t necessarily miss it on my paycheck,” Kono said. “But in the back of my mind I know it’s there, and I’m doing the best I can to put money away.”
Kono is one of the 55 million Americans — about half of the private-sector workforce — who don’t have access to an employer-sponsored retirement plan. Research shows that workers are likely to save more for retirement using such plans than using individual IRAs. The majority of those without a work-based plan option are people who tend to need retirement help the most: those working for small businesses in the low-wage service and hospitality sectors.
Since 2015, Oregon and four other states — California, Illinois, Connecticut and Maryland — have set up these so-called “auto-IRA” programs overseen by the state. Nine more states are considering similar programs this year, among them New York, Missouri and Pennsylvania.
But the investment industry is standing in the way, aggressively deploying trade groups and raising the specter of legal threats to stop the proliferation of these plans. Behemoths such as the National Association of Insurance and Financial Advisors and the U.S. Chamber of Commerce oppose the plans because they argue the private sector already provides options for workers like Kono. But many small businesses, such as Annastasia Salon, find the private plans too expensive.
The industry’s lobbying efforts look to be winning, as proposed state-run retirement plans are languishing in statehouses around the country.
Retirement in America
For decades Americans relied on what retirement experts call the “three legs of the retirement stool” — Social Security, pensions and retirement savings accounts such as 401(k) investment plans, in which workers make contributions to a retirement plan that employers may match with additional funds. At most, economists say, Americans should count on Social Security to pay for about half the cost of post-retirement life.
But today’s workers can’t count on pensions. In 1983, 62 percent of private-sector workers covered by a retirement plan had a pension, according to the Center for Retirement Research at Boston College. By 2016, only 17 percent did.
And retirement savings accounts aren’t always readily available, either. About half of private-sector workers aren’t covered by a workplace retirement savings plan such as a 401(k) or a payroll-deduction IRA according to a 2015 report by the U.S. Government Accountability Office.
Those who don’t have access to a retirement plan are most likely the working poor. Only 14 percent of workers making $17,682 a year or less reported participating in a workplace retirement savings program compared with 76 percent of those making more than $53,601 a year, according to GAO.
Workplace retirement plans, as opposed to individual IRAs, are a big deal because workers are 15 times more likely to save for retirement if they are offered a retirement plan at their workplace, according to the AARP, mostly because contributions are automatically deducted from employees’ paychecks.
Policymakers wanting to avoid a potential retirement crisis view the state-sponsored auto-IRA model as a simple, low-cost way to provide workplace retirement plans that gently nudge workers with no other option to plan for a more financially secure future.
“These plans are not going to solve all our problems,” said Alicia Munnell, the director of the Center for Retirement Research at Boston College, part of the Retirement Research Consortium established by the Social Security Administration in 1998 to produce research on Social Security and retirement income issues. “But through them, lower income workers will have some short-term saving funds. If the roof goes, or the car has a breakdown, they will have a cushion.”