Grant’s Go-To’s: Big Design Decisions- Program Models

Boards and task forces working to develop state-facilitated retirement savings are actively considering various program design decisions. Key questions include whether to use automatic enrollment or automatic escalation, where to set standard employee contribution (or deferral) rates, what type of investment option should be the default for participants who do not choose an investment, and whether to require employers to participate if they don’t already offer retirement savings options for their employees.

One of the most important initial decisions is the overall program structure. To date, the market has generally settled on three distinct models: Multiple Employer Plans (MEPs), Automatic Individual Retirement Accounts (Auto IRAs - with or without an employer mandate), and some form of voluntary marketplace with a selection of low-cost and easy-to-administer retirement plan and product offerings from which employers may choose.   

As with all program design decisions, choosing the overall program structure involves weighing the pros and cons of each model. MEPs and marketplaces provide flexibility to offer a wider range of savings products. They also allow for employer contributions, but they don’t allow for mandatory employer participation. In contrast, Auto IRA programs allow states to require employer participation but preclude employer contributions. IRAs also have significantly lower contribution limits than the 401(k)s that can be offered through MEPs or marketplaces.

The Virginia College Savings Plan’s Report on State-Facilitated Private Retirement Plan Programs and the North Carolina retirement security Study Committee’s report, Retirement Security in North Carolina, both provide an analysis of the three models. For an overview of MEPs, including recent federal guidance and a comparison of MEPs and IRAs, the Georgetown Center for Retirement Initiatives published a 2017 policy report titled, Multiple Employer Plans (MEPS): An Overview of Legal, Regulatory and Plan Design Considerations for States. It’s definitely worth a read.

The Georgetown Center for Retirement Initiatives’ 2021 State Program Status update reveals that of the 12 states (and one city) that have enacted programs (some operational and some still in development), 8 states and the City of Seattle have enacted Auto IRA programs. The Massachusetts and Vermont programs are MEPS. The State of Washington operates a marketplace.

New Mexico has adopted a hybrid model that will include a marketplace and an employer-voluntary Auto IRA. Note that the idea of an employer-voluntary Auto IRA itself brings some complexity. Could employers be considered fiduciaries if they choose whether to facilitate or not? If the program is not mandatory, might it be better to offer something that offers the ability to save more, and which gives employers the ability to match if they want — like a MEP does?

There’s no easy answer to the question of which model to choose. A “one-size-fits-all-states” approach does not exist. At Massena Associates, we believe it makes sense to choose a model that has the potential to move the needle on retirement savings and security, and to ensure the decision is informed by meaningful input from stakeholders and a thorough analysis of the needs and interests of employers and workers in the state.  

Stay tuned! / Grant

This piece was featured in the February 11, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.