Grant’s Go-To’s: Considering the Employer Mandate
One of the key decisions in the development of a state-facilitated retirement savings program is whether to require employers to participate if they don’t already have some type of qualifying plan available for their employees. Because an employer mandate is not possible with an ERISA multiple employer plan, this is really only a decision for Auto IRA programs.
Making a program voluntary for employers can look like the easier path to legislative success. It’s not uncommon for interested parties to express concern about possible administrative complexities for employers. And everyone is sensitive to the impact of the COVID-19 pandemic on both employers and employees.
On the other hand, employer-voluntary approaches have so far shown limited uptake and use.
From a public policy perspective, a key question is whether including an employer mandate will significantly increase workforce access and participation. To examine this question, let’s look at recent data from California where the first CalSavers employer deadline (for employers with more than 100 employees) went into effect September 30, 2020.
As the graphs below illustrate, three months after the first CalSavers deadline took effect, the number of registered employers increased by 108 percent, the number of funded accounts by 249 percent, and the total assets of the program by 157 percent. It’s fairly evident the combination of an employer requirement and a deadline increased participation significantly.
Of the 9 states (and one city) with legislatively enabled Auto IRA programs, only the states of New York and New Mexico (whose hybrid program also includes a voluntary marketplace) currently make participation voluntary for employers.
Most, but not all, states with required employer participation exempt employers of a certain size or those that have been in business for only a short time.
New Jersey and Illinois, for example, require participation for employers with more than 25 employers that do not offer a qualified plan. California, Colorado and Connecticut exempt employers with fewer than five employees. Maryland includes employers who pay their employees through a payroll system or service, intending to exempt those who are smaller and less automated.
OregonSaves and the potential City of Seattle program require all employers to participate regardless of how many workers they employ. Most of the states have adopted a gradual phasing in of the employer mandate that begins with larger employers. Oregon’s program has pushed out its deadline for the smallest employers, giving them more time to respond. Interestingly, smaller employers also make up a large percent of the population who begin facilitating the program ahead of their formal deadlines.
To encourage compliance with employer mandates, states have established systems that combine meaningful employer support with the potential for monetary penalties for employers who are required to facilitate, but do not. The CalSavers and Illinois Secure Choice statutes authorize the states’ tax and revenue departments to enforce penalties of $250 per employee for the first year, increasing to $500-$750 per employee thereafter. Under the OregonSaves law, the state’s Bureau of Labor and Industries has the authority to enforce penalties of $100 per affected employee with a cap of $5,000 per calendar year.
It should be noted that in response to the pandemic states have slowed implementation of their enforcement plans while continuing to actively engage with employers to support them in facilitating. States have also clearly said that while they know the possibility of a penalty helps employers understand that the requirement is real, they hope they never collect a single dollar in penalties and are much more interested in providing technical support that gets employers through the simple steps associated with facilitating payroll deduction-based savings.
The Georgetown Center for Retirement Initiatives’ recently updated Snapshot of Program Design Features is great resource for more information on employer mandates and other design features adopted by the states with retirement savings programs or initiatives.
Mandates encourage employer facilitation which is the gateway to access for employees, but what about workers themselves? How do states encourage employees to participate and save for retirement? In the next edition of this column, I’ll explore the “soft paternalism” of features such as automatic enrollment and automatic escalation of contributions.
Stay tuned! / Grant
This piece was featured in the February 25, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
