Grant’s Go-To’s: Estimating Program Costs

How much does it cost to start a state-facilitated retirement savings program (SFRP)? How long will it take to break even and become self-sustaining? These are some of the key questions being asked by officials in states and municipalities that are considering, or already working to launch, SFRPs.

SFRPs incur costs before the first contributions ever come through the door.

In addition to the costs of paying a program administrator (record keeper) to set up the infrastructure, initial program expenses also include the services of investment, legal and program consultants who advise program boards and staff on design, implementation and operations. Outreach to employers and workers, particularly important in the early stages of a program’s operation, add to the start-up costs as well.

The baseline scenarios of several states’ feasibility studies projected that auto-IRA programs would reach positive cash flows within about 3 to 5 years and be able to pay off their start-up financing by year 6 or 7. Alternative scenarios that used more conservative assumptions projected positive cash flows by 4 to 8 years and about 9 to 12 years to pay off start-up costs.

What explains the differences in projections between scenarios and from one state to another? Some of the key variables include the default contribution rate, the level of investment fees charged, and assumptions about opt-out rates.

In a nutshell, the more workers who participate, and the more money those workers contribute, the more quickly revenues will outpace costs and the more quickly the programs will become self-sustaining. This means decisions such as whether to require employer participation, whether to include automatic enrollment and escalation, and what level to set the default contribution significantly affect SFRP’s financial models.

The employer size threshold is another important factor. The 2017 Illinois Secure Choice Feasibility Study noted that even though the state had 150,000 employers, only 14,000 met the thresholds of having 25 or more employees and 2 or more years in business. Two bills currently moving through the Illinois Legislature (HB 117 and SB 208) would lower the threshold to include employers with 5 or more employees.

Quoted in a May 19 article in Investment News, Georgetown Center for Retirement Initiatives director Angela Antonelli says the change could add as many as 1 million additional workers covered by Illinois Secure Choice.    

Interested in learning more about the assumptions used in financial modeling of SFRPs? Check out the financial feasibility studies of auto-IRA programs for states such as California, Connecticut, Illinois and Oregon.

Key differences that set SFRPs apart from traditional defined contribution plans make it difficult to make projections about participant behavior using existing research on 401(k)s.  SFRPs target lower income earners who are less likely to be able to set aside savings. And existing auto-IRA SFRPs do not offer employer matches that can incentivize greater savings in the 401(k) world. For these reasons, it’s important to adopt assumptions about participation that reflect the unique state-facilitated program market. 

Programs undertaking financial feasibility studies today have the advantage of being able to examine the actual experience of programs currently operating. The final study for the Colorado Secure Savings Program, for example, adopted more conversative assumptions about the proportion of inactive to active accounts and the time to onboard employers based on actual program experience of OregonSaves.   

The initial investment required is certainly a challenge that must be addressed when developing an SFRP. But what are the costs of not taking action to encourage more workers to save for their futures in retirement? Next time I’ll turn my attention to studies that have examined the “costs of doing nothing.”

Stay tuned! - Grant

This piece was featured in the June 3, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.