State-Sponsored Retirement Plans Could Help Us To Save

Getting people to adequately save for their retirement is a well-known problem affecting societies across the world. A recent study from Rice University suggests that state-sponsored plans could help.

A recent study from the Federal Reserve highlighted how 25% of American workers lacked any kind of retirement savings, with a further 40% falling behind in their retirement plans. The Rice study suggests that state-sponsored retirement plans (IRAs) might be part of the solution.

“Supporters of state-sponsored IRAs see great benefits in bringing new savers to the retirement saving system,” the author explains. “They argue that retirement savings not only provide emergency financial safeguards, but also reduce savers’ reliance on social services in retirement. If a significant number of retirees are unable to support themselves, there will be significant pressure on the public safety net and current workers will ultimately bear the costs.”

Smarter retirement

The researcher explains that we’ve seen a shift in the role of Social Security over the last few decades, with workers expected to play a more active role in ensuring they have adequate retirement savings.

“This structural change means workplace saving plans have become more critical,” the author continues. “Several studies find that people who have access to retirement savings through work are more likely to save; most of these plans use payroll deductions and make saving easy for workers.”

A number of states have already begun to offer state-administered IRA programs, but concerns exist about the fees associated with them and whether these make them excessively expensive.

“Anyone can have access to IRAs, even if your employer does not offer any retirement plans; but if you do it yourself, you only pay for a company like Vanguard or Fidelity to manage the assets,” the author explains. “If you go through the state, you pay extra fees.”

Fiduciary duty

The paper highlights how employers don’t have any kind of fiduciary duty in state-sponsored plans, but instead would act as conduits by which funds are channeled from workers to the respective plans. Instead, the employer’s role is largely limited to encouraging employees to save for their retirement.

Many small businesses don’t offer any kind of retirement plan, and frequently cite the administrative burden and costs involved for failing to do so. Robust state-sponsored plans could therefore be beneficial to employees of such small businesses, as well as people working in the gig economy.

While there are concerns that auto-IRAs would eventually grow to replace employer plans, this isn’t a concern that the author believes is valid.

“However, preliminary analysis largely does not find substitution between state and employer plans,” they conclude. “A survey-based study shows that there is little evidence that state initiatives crowd out employer plans. On the contrary, some employers would rather start their own plans instead of using state-mandated plans.”

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