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States Up the Pressure on Retirement Plans for Private Workers

California's new state-administered retirement savings program for certain private-sector workers could serve as a model for other states.

November 8, 2012

California state Sen. Kevin de León was raised by an aunt who worked hard cleaning homes for decades. Although her job provided an income for de León's family, it didn't have a 401(k) or any other savings plan to put a little bit aside for her own retirement.

De León says his 76-year-old aunt needs to keep working because she hasn't accumulated any real savings for retirement.

"This woman put food on our table and to think she is one of millions of people like her who can't retire with a modicum of dignity is unfathomable," says de León, a Democrat whose Los Angeles-area district includes Alhambra, Maywood and South Pasadena. "People like my aunt are retiring not because they want to, but because they can no longer work. They are relying on public assistance, and that's not the way hard-working people want to retire."

Earlier this year, de León introduced a bill that would create a state-administered retirement savings program for certain private-sector workers whose employers don't offer a 401(k) or defined benefit pension plan. Although many details need to be worked out, the bill was signed into law by Gov. Jerry Brown in September.

Businesses with no company retirement savings plan will need to redirect 3 percent of employee pay into the state-run account. The law is expected to help the 6.3 million Californians with no retirement plan at their workplace.

The issue isn't new, but with the Bureau of Labor Statistics showing that 45 percent of America's workforce doesn't have access to a retirement plan, many state legislators are looking to sponsor state-based retirement plans for private or nongovernment workers.

"We are looking at California as a model that can be spread to other states," says Karen Friedman, executive vice president of the Pension Rights Center in Washington. "We need to take steps to help workers increase retirement savings."

The U.S. Bureau of Labor Statistics' September report, Beyond the Numbers: Pay and Benefits, also shows that more than 60 percent of low-wage workers don't have access to a company-run retirement account, compared with 15 percent of high-wage workers. Experts are skeptical that low-wage earners would save on their own with an Individual Retirement Account, given that only 17 percent of these earners who have a plan participate in it, the statistics figures show.

"I think retirement-savings issues are going to be a critical part of the 2013 legislative session," says Sujit CanagaRetna, senior fiscal analyst in the Council of State Governments' Atlanta office. "People will be increasingly reliant on state and local governments to take care of them, and they will become an extra financial burden at a time when states are facing their own fiscal challenges."

Since 2006, more than a dozen states have considered studying the issue or have introduced bills to create some type of retirement savings plan, according to an October update on the issue by the National Conference of State Legislatures.

Massachusetts passed a law in March offering small not-for-profit organizations the ability to join a retirement savings plan run by the state. Connecticut, Illinois and West Virginia were active in 2012 with bills in committees or had plans to study the concept.

The Pension Rights Center co-sponsored a forum on state-based retirement plans for private workers in September. Officials from California, New York, North Carolina, Pennsylvania and Rhode Island attended, Ferguson says.

"There is widespread interest," she says. "States want to do something because the truth is, 50 percent of our workforce has been without access to retirement plans for years. We've done a lot to create tax incentives, but people without access aren't saving."

Critics say the plan will add to the financial stress states are facing and that a 3 percent contribution isn't enough to truly help workers save for retirement. Jack Dolan, vice president of media relations for the American Council of Life Insurers, says promoters of the idea are well-intended, but legislators should in offering retirement savings plans focus more on eliminating the obstacles small businesses are already facing.

"Is there room for improvement? You bet," Dolan says. "But these types of bills are not going to help fix our retirement crisis. Many people do have a savings shortfall, but this idea doesn't address the issue."

The Washington-based life insurance interest group supports a bill sponsored by Rep. Ron Kind, D-Wisconsin, that would increase tax-credit incentives for small businesses to set up certain defined contribution plans.

Friedman says ideas on the federal level have stalled, and states are interested in helping workers save.

"Somebody somewhere has to do something," she says. "The fact that California took this step is a great thing, and we are hoping it encourages other states to do the same."

Patty Kujawa is a writer based in Milwaukee. Comment below or email editors@workforce.com.