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State board begins work on individual retirement savings plans

A new state board has started work on retirement plans that will enable more than 600,000 Oregonians without access to them to save for retirement.

Oregon is among a handful of states that have authorized or are considering state-sponsored retirement savings plans, open to private-sector workers whose employers do not offer them.

The seven-member Retirement Savings Board last month heard from state and national experts, including a couple representing California and Connecticut, where plans are underway or under study.

“We are going down the same path at the same time, so it makes sense for us to share information, rather than reinvent the wheel,” says state Treasurer Ted Wheeler, the board’s chairman. “This is a good example of interstate collaboration on what has been learned.”

Oregon legislators created the board in 2015 after they authorized a study back in 2013. The board, which has two nonvoting legislators, will report to the Legislature at the end of 2016.

“My hope is that it is a seamless transition,” Wheeler says. “I’d like to see this through to the end.”

Actual plans would start up in July 2017, six months after Wheeler — a long-time champion of the concept — leaves office as state treasurer.

One of the board’s nonvoting legislators is state Rep. Tobias Read, a Democrat from Beaverton, who is running to succeed Wheeler in the 2016 election. The other is Sen. Lee Beyer, D-Springfield. They were floor managers of the 2015 legislation that created the board.

Wheeler, Beyer and Read received national AARP Super Saver Awards for the passage of Oregon’s 2015 legislation.

“AARP’s inaugural class of Super Savers includes those elected officials who were integral to the passage of Work and Save plans in 2015,” says Nancy LeaMond, chief advocacy and engagement officer for AARP.

John Chalmers, a finance professor at the Lundquist School of Business at the University of Oregon, says factors for success will have less to do with specific features in the plans and more to do with who is promoting participation and how their message is spread.

Keys to participation

Among the elements that experts recommended in state-sponsored retirement savings plans are automatic enrollment of participants — with allowances for workers to opt out — plus simplicity of choices and availability of low-risk savings plans.

According to research by AARP, an advocate of plans in Oregon and other states, 630,000 workers — about half of Oregon’s private-sector workforce — could benefit from plans. Employers would not contribute to plans, other than providing for payroll deductions for enrolled workers, and the state would not guarantee returns.

David John, a senior strategic policy adviser for the AARP Public Policy Institute, says that while the most likely participants are younger than 55, more than 40 percent are projected from the 55-64 age group on the cusp of retirement.

While retirement savings plans abound, John says, they enroll barely 5 percent of those who have no access to such plans at work.

“We have learned the hard way that the traditional way of structuring a retirement savings program — where individuals have to sit down and decide when and how much to save, and what plan they will save in — is a guaranteed failure,” he says.

“If you do not use automatic enrollment, people do not know what to do. And we know that when people don’t know what to do, they make the decision next Tuesday — and Tuesday never comes.”

Automatic enrollment, he says, will boost participation to 70 percent and higher.

John says such plans are not intended to supplant federal Social Security, but will supplement them so that retirees do not have to tap safety-net services such as food and energy assistance.

He mentioned the conclusion of a study that AARP participated in and Rutgers University is conducting in New Jersey.

“For every dollar that the state and federal governments are going to spend (on those programs) in New Jersey today, they are going to spend $17 in 15 years ... unless we increase the ability of a number of people to save for retirement,” John says.

Other states

California lawmakers authorized a study and planning in 2012, but they will have to approve specific plans before they take effect.

Nari Rhee, who took part in shaping the 2012 legislation, now is involved in drawing up specific plans.

She says they are likely to be similar to, but not identical with, individual retirement accounts (IRAs). Opinion is split, she says, between a savings plan oriented to growth — likely connected with investment in stocks — and a plan emphasizing protection of principal amounts.

“States are faced not only with what is good for the program or participants, but also what is the political tolerance in the Legislature,” says Rhee, now manager of the retirement security program at the Center for Labor Research and Education at the University of California at Berkeley.

Rhee says a mandatory contribution rate for participants probably cannot exceed 5 percent — and that many potential participants say they would opt out if they cannot have access to savings in case of unemployment or illness.

There are financial penalties for early withdrawals from current IRAs.

On the other hand, a recent study conducted by Boston College for the state of Connecticut found public resistance to the concept of guaranteed rate of returns — something not contemplated in Oregon’s plans.

“If it’s guaranteed, but you will not make a high return, people do not like that,” says Geoffrey Sanzenbacher, a research economist at the Center for Retirement Research.

Other states in various stages of state-sponsored plans are Illinois and Maryland.

The U.S. Department of Labor is proposing rules that may clear the way for state-sponsored retirement savings plans in Oregon and other states. The rules, announced in mid-November and subject to a 60-day comment period, would determine that such plans do not conflict with a 1974 federal law governing pensions — as long as workers can opt out and employers are not compelled to contribute to them.

In a related development, U.S. Sen. Jeff Merkley, D-Ore., says he will introduce legislation that will open up the Thrift Savings Plan to others besides federal civilian and military employees. The plan is based on IRAs.

“The reason a huge number in our society do not have access to a savings plan at work is because of our current system, which imposes such an administrative overhead on our small businesses,” Merkley said at the recent Oregon Business Summit in Portland.