Grant’s Go-To’s: How Will SFRP’s Shape the Retirement Savings Marketplace?
What does it mean to provide expanded retirement coverage in the US - and who should do it?
Since the beginning of 2021, I’ve noticed an uptick in media stories and marketing highlighting alternatives to the state-facilitated auto-IRA programs in California, Illinois and Oregon. One California company, for example, describes its Pooled Employer Plan (PEP) 401(k)s as more suitable for highly compensated employees because unlike IRAs, 401(k)s allow for employer contributions and have higher annual employee contribution limits.
“Fair enough,” I think to myself as I skim through the article. But I bristle when I come to their characterization of CalSavers as a “half-measure” with an opt-out rate significantly higher than that of 401(k) plans.
I can’t help but to craft talking points in my head. State-Facilitated Retirement Savings Programs (SFRPs) are designed to be simple and to serve a broad range of workers, not just the highly compensated. It should not be a surprise that opt-out rates are higher for programs aimed at low-income workers who may be struggling to make ends meet and may have little or no previous experience saving for retirement. “Half-measure” doesn’t seem to be an apt descriptor for programs that serve an unmet need with innovative design features aimed at maximizing participation and savings.
As my silent rant winds down, I adopt a more measured perspective.
If SFRPs serve as a catalyst for innovation and create opportunities for financial service providers to market to a segment of the workforce that has previously been underserved, isn’t that a good thing?
CalSavers Executive Director, Katie Selenski, seems to think so. In the March 5, 2021 episode of the 401(k) Fridays podcast, when asked about the relationship between CalSavers and the traditional 401(k) marketplace, Katie responded by saying that “from our perspective it’s absolutely not competitive. We’re mission driven. We want to improve access and coverage so that we can all be on the path to retirement security.”
Katie acknowledges that 401(k)s have advantages over IRAs but is quick to add that there will always be a need for CalSavers to serve employers who prefer not to adopt their own plans. Overall, she views CalSavers as a compliment to the evolving traditional retirement savings marketplace and says she’s curious to see how the new PEPs will roll out.
When we think about how to measure the success of SFRPs, it’s logical to begin with the programs themselves, and to focus on metrics such as growth in the areas of employer registration, funded accounts and assets under management. Those things should absolutely be measured on a regular basis and used to continually improve program performance.
But if the ultimate goal of SFRPs is to increase access and participation, it’s also important to measure the broader impact of these programs on the marketplace.
Anecdotal evidence that SFRPs are inspiring innovation and uptake is encouraging, but assessing the extent of the “SFRP effect” on the marketplace will require research. On that note, I was happy to hear Katie indicate on the podcast that CalSavers has already thought of this and has had some discussions with independent organizations who might take on the work. Massena Associates will keep our collective eyes out for promising news on the research front and share what we learn with you.
Stay tuned! - Grant
This piece was featured in the April 8, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
