By Jill Schlesinger
Tribune Content Agency
There is some much-needed good news for retirement savers: As investing fees hurtle toward zero, employers are seeing the benefit of ditching expensive funds from 401(k) plans and replacing them with cheaper index funds. The result has been a boon for retirement savers. Why are fees so important? Like termites that eat away at your foundation, higher investment costs can erode your potential savings by tens or even hundreds of thousands of dollars over your lifetime.
Yet lower fees alone will not solve the retirement savings shortfalls that many Americans face. According to the Investment Company Institute, the 401(k) is the most popular type of defined contribution plan, with $4.5 trillion in plan assets. That may sound like a lot of money, but a recent Employee Benefit Research Institute survey found that while retirement confidence has increased since the end of the Great Recession, "in the aggregate, only a minority of all workers appear to be taking basic steps needed to prepare for retirement." The numbers are depressing: More than a quarter of those surveyed say they have less than $1,000 saved for the future, and more than half have saved less than $25,000 dollars.
The main factor affecting the retirement savings rate appears to be access to a plan offered through work. Turnkey salary reduction plans such as the 401(k), 403(b) and 457 make it easier for people to save. But many Americans work for small companies that do not offer any type of retirement plan; as a result, about half of private sector workers are not covered by any employer-sponsored retirement plan.
That may change as 18 states are considering new retirement savings initiatives. Connecticut, California, Oregon and Illinois are closest to creating state-run retirement savings programs for private-sector employees whose companies do not offer plans.
One may wonder why we need them. After all, anyone can open a traditional or Roth IRA, or access the government's MyRA plan for small investors. Connecticut State Comptroller Kevin Lembo says that might "be true in an ideal world - but in the real world it's simply not happening for a variety of reasons, including cost and perhaps mistrust or misunderstanding of the financial industry. It is a plain fact that savings rates vastly increase when (contributions can be made) through payroll deduction."
Lembo's statement is consistent with findings from the Center for Retirement Research at Boston College. According to a report it published in April: "With the need for retirement saving growing, the lack of access to an employer-based plan has emerged as a pressing problem. ... (T)he largest coverage gap occurs among workers at small firms (those with fewer than 100 workers)."
Here's how the state plans would generally work: Companies with more than five employees would automatically enroll their employees into a state retirement plan at a 3 percent to 6 percent contribution level. The state would select and oversee a private-sector investment company, which would manage each participant's money in a fund appropriate for someone of the participant's age. All funds would be kept separate from the state's pension fund.
Although enrollment would be automatic, participation by employees would be voluntary; workers would have the ability to opt out.
Connecticut is closest to actually implementing a program, which could be an important test of the extent of the burden on employers, as well as the participation of employees. If the state plans work, they may help close the retirement coverage gap and boost long-term savings for American workers.
Contact Jill Schlesinger, senior business analyst for CBS News, at askjill@JillonMoney.com.
This column was printed in the June 26, 2016 - July 9, 2016 edition..