No Silver Lining? Let’s Look Again.
Keith Welks is Senior Advisor to the State Treasurer in the Pennsylvania Treasury Department. In this role he is working on several discrete projects, including the Keystone Saves retirement initiative championed by State Treasurer Stacy Garrity and enhancements to the Department’s unemployment insurance benefits disbursement platform. During his tenure at Treasury, Keith helped develop some of the ideas included in proposed legislation for Keystone Saves and identified investment opportunities for Treasury related to green and clean technologies.
We were talking with Keith recently about whether, as some have suggested, this is a particularly bad time for states to consider Auto IRA legislation. Not surprisingly, Keith had an opinion and some data to back it up. Here, Keith generously shares what he has seen and learned during the pandemic, and how states may factor the pandemic experience into their thinking.
Confronting a pandemic.
No rational person would suggest that the continuing COVID-19 pandemic prompts anything like the “best of times / worst of times” dialectic that Dickens used to introduce comparably profound social and political challenges, and sweeping changes, confronting late 18th Century France and England in A Tale of Two Cities. While the pandemic has certainly presented challenges and propelled changes, there’s no good – let alone best – in the more than 820,000 American deaths and over 54,000,000 confirmed cases (to this point). There’s no good in the additional millions of family members negatively affected to greater or lesser extents. There’s no good in the educational setbacks millions of American students of all ages have likely suffered. Finally, there’s no good in the economic havoc that the pandemic, and various evolving efforts to knock down its most lethal consequences through commercial lockdowns, mask mandates, vaccination programs and the like, have caused.
But even allowing that there’s no good in anything to be found from this horrific situation, is it therefore necessarily true that the pandemic has been the worst of times for everything?
More pointedly, has the pandemic created new or enhanced obstacles that could thwart efforts by states to enact legislation authorizing the creation of workplace-based auto-IRA programs? Will it impede those hoping to move forward with implementation of such programs pursuant to recently enacted statutes?
Damaging business impacts.
The intuitive response could understandably be a strong nod in the affirmative. Many businesses, and especially smaller and medium sized ones, have suffered multiple terrible blows from the pandemic: voluntary (and sometimes compulsory) limits placed upon travel, socializing, participation in large crowd events, and consumption of a wide range of non-necessary goods and services have dramatically reduced demand – and therefore revenue – in many sectors of our economy. Persistent inflation for raw materials and intermediary products driven by myriad pandemic-related factors are placing significant downward pressure on profits for firms already struggling to appeal to wary customers.
The cash and profit crunch of these impacts has undoubtedly hit many small businesses hard, and in places they may be least able to absorb heavy blows. A survey conducted for the Proceedings of the National Academy of Sciences underscores the financial fragility of many businesses. From firms with monthly expenses of more than $10,000, the median business said it could only survive about two weeks with the cash it had on hand. Perhaps even worse, about 75% of responding firms said they would not be able to last more than two months with cash on hand.[i]
Concerns about the economic severity of these impacts have sadly turned out to be largely well-founded.
Business conditions and operating status are dynamic, not static, and respond to many factors in addition to COVID-19 impacts. Assessments seeking to quantify the damage wrought by the pandemic necessarily vary to some extent depending upon timing and level of detail elicited by survey instruments. Nonetheless, there seems to be a fair degree of consensus that the number of small American firms had declined by roughly one-third by the middle of 2021.[ii] Although it may not yet be clear either how many may have since reopened or how many closings were occasioned by factors other than the pandemic, there is little doubt that American businesses have faced exceptional stressors since early in 2020.
The Big Quit.
And businesses do not have the luxury of worrying only about attracting new, and retaining existing, patrons. A record number of American workers quit their jobs in April of this year. An even larger number quit in May,[iii] and about that same time Texas A&M business and management professor Anthony Klotz began popularizing the term “The Great Resignation” (sometimes more casually called “The Big Quit”) to describe the phenomenon of significantly large numbers of workers deciding they were sufficiently disenchanted by their employment situations during the pandemic to simply quit.[iv]
The trend has continued: November saw a new record, with about 4.5 million workers departing their jobs. Indications, moreover, suggest that we may be only in the early stages of the phenomenon: in a recent survey of more than 31,000 workers, 41% reported to Microsoft that they are considering quitting or changing their positions within a year.[v]
The impact of these decisions to turn away from regular jobs is not visited evenly across the American economy.
Almost 6.5% of the workforce (roughly one out of every 15 workers) in the leisure and hospitality sector left their existing positions in September; that’s not far from twice the incidence of departures in the next most affected area of the economy (trade, transportation, and utilities).[vi] Perhaps not coincidentally, hospitality sector employees are less likely to receive retirement savings benefits than workers in any other sector.[vii]
Thus, to rephrase the question, have the challenges the pandemic has forced on employers in fact made this the worst possible time to be promoting a new state-facilitated workplace auto-IRA program intended to increase employee retirement savings activity?
Obvious, but incorrect?
Remarkably enough, there appear to be several strong reasons why the obvious answer may very well not be the right one. Perhaps the most significant of these considerations come directly from the core DNA of the auto-IRA model.
Struggling businesses can see themselves confronted by an impossible conflict: they face inexorable pressure on one hand to exercise tight control over expenses to survive during periods of substantially reduced revenues but, on the other, simultaneously need to address heightened demands from employees who have become more willing than ever to leave jobs that do not meet their expectations. The tension between these seemingly incompatible drivers can easily lead to indecision and inaction by business owners; extended inability to solve the conundrum can result in business failure.
State-facilitated auto-IRA programs can be viewed as almost designed in a laboratory specifically to provide employers with a responsive solution to this riddle.
These programs have as their North Star the objective of establishing retirement savings opportunities for employees in their workplaces that rely upon exceedingly modest investment or involvement by covered employers.
Although program details vary somewhat from state to state, generally each asks employers only to enable employees to participate in the program (excepting for those workers who affirmatively opt-out) and then to take periodic deductions from the workers’ pay and remit them to the program.
Moreover, this prime directive is not simply reflected in program details; in some instances, it is explicitly laid out in enabling language. For example, the bill poised for introduction in the Pennsylvania General Assembly seeking to create an auto-IRA program in the Commonwealth is expected to direct the state Treasury Department to cause and establish the program so that it maximizes simplicity and ease of administration for employers, minimizes financial costs for employers, and minimizes interactions between covered employees and covered employers.
Public-Private Partnership times two … or more.
This guiding principle is achieved in implemented programs by overlapping public-private partnerships. The responsible state agency forms what is in effect a partnership with each participating employer, providing each firm with the ability to offer an attractive workplace retirement savings opportunity to its workers at little or no cost by assuming the burdens of administering all the complex back office (and asset management) functions associated with such a program. The employer contributes to the partnership by taking the minimal, previously described steps necessary to deliver employee contributions to the program.
At the same time, the state agency also forms partnerships with specialized companies that provide both the necessary back office administrative functions and asset management skills needed to oversee investment strategies for the retirement savings. These firms are generally compensated by fees charged against the assets they manage. The employers provide no compensation to the firms (and, to be clear, are barred from making any direct contributions to employee retirement accounts). The nature and structure of the savings program makes them exempt from ERISA responsibilities, another significant benefit to employers.
In short, auto-IRA programs enable those employers who have no retirement plans to offer this savings opportunity to their workers at virtually no cost, an incredibly attractive notion in the midst of a pandemic that is seriously squeezing the continuing economic viability from many businesses. Moreover, the good news for employers doesn’t stop there.
An opportunity that represents only a benefit in the eyes of employers is not likely to meet the heightened expectations of today’s workforce. Fortunately, there is substantial evidence that employees will greet the introduction of a retirement savings opportunity at their job with enthusiasm. A survey conducted by Glassdoor (a firm/website focusing on insights about jobs and companies) found that almost four out of five workers responding said they preferred new or additional benefits to an increase in salary (and that preference jumps to 89% of younger workers). Specifically, 31% identified retirement plans as an important benefit for them, a proportion virtually the same as those preferring more paid sick days and higher than the number favoring flexible/work-from-home opportunities.[viii]
If you offer it, they could stay.
Speaking directly to the retention question, a 2012 study conducted by Environics Research Group reported that 92% of employees at small and mid-sized companies identified “workplace savings and retirement plans” as important factors in staying with their current employer. A more recent survey by Willis Tower Watson found that 75% of those responding said that the availability of a retirement plan (in this instance, a 401(k) vehicle) was a compelling reason to remain at a firm.[ix] The breadth of these findings confirms that employers currently without any retirement savings options gain a terrifically valuable weapon in the battle to attract and retain employees with the introduction of a state-facilitated auto-IRA that enables them to deliver – again, with little or no impact on their bottom lines – this coveted employment benefit.
The particular nature of auto-IRA programs supplies a similar, but distinct, additional benefit. Most state-facilitated programs in existence today automatically put employee contributions into Roth – rather than traditional – IRA accounts (many programs also allow participants to opt into traditional IRA accounts). Why is this nuance important? The pandemic did not only devastate many businesses; it of course also forced wrenching changes upon the lives, and livelihoods, of an extraordinary number of American workers. According to Pew Research, approximately 9.6 million Americans lost their jobs due to the pandemic, with 8.5 million still out of work in February of 2021.[x] These workers faced the sudden and entirely unexpected loss of their income, whether due to their employers closing or their inability to continue in their jobs because of infection or isolation requirements. Given the cruel – contagious – nature of the cause, even dual-income families could find themselves abruptly severed from both sources of income.
The plight of these individuals and families brought the need for improved access to emergency savings funds into much sharper relief.
Many Americans with notoriously little dedicated to saving for rainy days (see, for example, the startling revelation that almost 40% of us couldn’t cover a $400 emergency expense with cash, savings, or credit card, https://abcnews.go.com/US/10-americans-struggle-cover-400-emergency-expense-federal/story?id=63253846), suddenly found the weather not at all to their liking. Unsurprisingly, many Americans, when they consider it, look to their place of employment (that is, the source of their income) to play a role in solving this challenge. Sixteen percent of employed workers – and the notably higher 45 percent of unemployed ones – see emergency savings accounts funded through deductions from their salary (and employer permitted payroll advances) as one of the most important employer-sponsored financial wellness benefits.
And the advantages may not run in only one direction. According to Craig Copeland of the nonprofit Employee Benefit Research Institute, “Employer interest in emergency savings programs lies both in the direct potential benefit to workers, as well as a benefit to employers in the form of higher employee satisfaction.”[xi]
A key characteristic of the Roth IRA featured in most state programs is that, because contributions are made to it post-income tax deductions, there are far fewer negative consequences for early withdrawals of funds.
For most purposes, workers can withdraw contributions to their workplace Roth accounts without penalty, making the structure appropriate for use as a source of emergency savings funds. (This would generally not be true for funds in a conventional IRA or more traditional employer-sponsored retirement account, both of which impose penalties for most early withdrawals). This flexibility of Roth and similar structures to be highly suitable for emergency purposes has been recognized by several state auto-IRA programs; in fact, the previously referenced pending Pennsylvania legislation is expected to speak specifically of the program structure being capable of providing a financially advantageous harbor for emergency savings activity.
Benefits enough to be shared by all.
Thus, at a moment when businesses are uniquely struggling at once to freeze – or even reduce – their operational expenses yet still provide attractive advantages for hiring new employees and retaining existing ones, employers should greet the prospect of a state-sponsored auto-IRA program not with antipathy but with enthusiastic approval. These programs empower companies to deliver (again, at little or no cost) dual employment benefits that speak specifically to concerns that workers have highlighted in describing unmet workplace expectations.
Angela Antonelli, the Director of the Center for Retirement Initiatives at Georgetown University’s prestigious McCourt School of Public Policy, has recognized the powerful capacity of auto-IRA programs to provide benefits of mutual appeal to both employers and their employees. She recently observed, “With respect to the effects of COVID especially, do businesses understand that these kinds of programs help level the playing field for them? Employers that currently have no retirement savings plans for their workers are in no position now to absorb more costs, but these programs do it for them – they can offer an attractive retirement savings option to their employees at little or no cost.”[xii]
There are encouraging signs that the instant relevance of these benefits is being recognized, right now, in the real world.
Outside academia, for example, a recent We Got Work podcast sponsored by the Jackson Lewis law firm credited the pandemic with having shined a bright light on the value of employee benefits, where what once might have been regarded as “fringe” benefits are now central to attracting and retaining employees. Specifically, the podcast leaders advised, “employers should reevaluate their employee benefit programs and policies in light of COVID-19 . . . [and] tailor their offerings to meet employee needs . . . .”[xiii]
Mark Herbert, the Chief Strategy Officer and Managing Director (California) for the Small Business Majority sounded a very similar note. Based on his experience working with small and medium-sized businesses, he said, “Employers are trying to be as creative as possible in how they can economically attract and retain their employees. We see this as the perfect time to implement innovative ways – such as auto-IRA programs – to help companies accomplish this. We want employers to appreciate that these programs allow them to provide key worker benefits for free . . . benefits that will aid them in competing effectively against other companies.”[xiv]
State program progress provides optimism.
Fortunately, the pace of activity of state auto-IRA programs around the country provides a genuine basis for optimism. In the face of both the pandemic and the spectre of pandemic-related economic pressure on businesses, the just completed year saw remarkable progress in the auto-IRA space. Several states – specifically, Colorado, Virginia, and Maine – enacted legislation authorizing the establishment of state-sponsored auto-IRA programs that enable businesses without any retirement savings opportunities to offer automatic contributions to worker’s IRA accounts (in Maine’s case, the auto-IRA plan joins an existing state statute creating a state-based MEP program).
In addition, jurisdictions such as Connecticut, Maryland and New Jersey took meaningful steps – despite the pandemic’s baleful influences – toward implementation of programs created by statutes enacted earlier than 2020 (in Connecticut’s instance, the program actually began receiving participant contributions last year). Forward movement offers further rebuttal of the proposition that introduction of these programs is foolhardy for businesses dealing with enduring pandemic pressures. And the three pioneer states of Oregon, Illinois, and California continued to systematically (and successfully) add employers to their programs, open new participant accounts, and aid workers in accumulating savings that can allow them to retire in the future with far more financial security than they might otherwise have achieved.
It is also worth noting in passing that the behavior of participants in the operating auto-IRA programs in the three pioneer states lends credence to surveys finding that workers recognize, and value, the importance of prioritizing saving for long-term goals over immediate needs to a great extent.
Pensions and Investments reported in June of 2020 – well into the second year of the pandemic – that the level of contributions by workers into their workplace IRA plans in all the programs were either consistent or growing slowly.[xv] This trend ran counter to worries that large numbers of participating employees would feel compelled to reduce or eliminate their regular paycheck contributions to maximize current real income.
Additionally, withdrawals of previous deposits into retirement accounts, after an initial increase near the onset of the pandemic, have settled back to earlier levels. As of late 2021, all three programs were reporting withdrawal rates of less than 25% of participating employees (and some were withdrawals of only a portion of the account balance).[xvi] While it would be obviously be ideal if every participant did not need to draw at all from funds originally intended for retirement security, it is very encouraging that, pandemic pressures notwithstanding, more than three out of every four of these workers has been able to keep their eyes on the ultimate prize.
A common benefit to employers and employees.
The sharp bite of the pandemic has pushed to the foreground the often overlooked reality that many aspects of the employer-employee relationship are symbiotic, not adversarial. Businesses thrive when employees feel rewarded in their work and - not at all incidentally - remain healthy and able to both perform their jobs and not present risks to customers. Employers have consistently affirmed the desire to help their employees prepare for long-term financial security, resisting only the perceived expense and exposure from providing such benefits, not their intrinsic worth.
COVID has revealed how easy it is for economic precarity to plague both owners and workers.
While the introduction of the auto-IRA model was never a solution in search of a problem (insufficient preparation for retirement having long been recognized as a serious societal challenge), the pandemic ironically has raised its common value to a much higher plane. Employers today are desperately navigating between rocks of higher costs and shoals of disaffected staff, itchy to jump ship. With a state-facilitated program, they gain the ability to offer this convenient and effective wealth aggregating opportunity to their employees at little or literally no cost and effort. Even better, the retirement savings opportunity is a fringe prized by workers who associate it with job satisfaction and retention. Participating employees gain a coveted benefit that can materially aid them today in reducing anxiety about long-term financial insecurity.
Dickens also wrote, “Take nothing on its looks; take everything on evidence. There’s no better rule.”[xvii] Businesses long suspicious of additional governmental involvement in their activities may think they see in an auto-IRA program a bad idea proposed at the worst time. If so, they would be well served to look again. All available evidence indicates that businesses currently offering no savings opportunity can provide through such programs a valuable new benefit to their workers. In so doing, they will benefit themselves as well.
Keith Welks is Senior Advisor to the State Treasurer in the Pennsylvania Treasury Department. The views and opinions expressed in this article are entirely and his, and may not be considered to be statements by the Department of its position on any issues.
[i] The impact of COVID-19 on small business outcomes and expectations. (https://www.pnas.org/content/117/30/17656)
[ii] Fact-check: have one-third of US small businesses closed during the pandemic? (https://www.statesman.com/story/news/politics/politifact/2021/06/08/kamala-harris-small-business-closures-covid-fact-check/7602531002/
[iii] Three Myths of the Great Resignation. (https://www.theatlantic.com/ideas/archive/2021/12/great-resignation-myths-quitting-jobs/620927/)
[iv] Klotz is identified as first using the term in 2019 to predict a mass, voluntary exodus from the workforce. The Great Resignation is Here, and It’s Real. (https://www.inc.com/phillip-kane/the-great-resignation-is-here-its-real.html)
[v] Three Steps for Small Businesses to Survive the Great Resignation. (https://www.linkedin.com/pulse/3-steps-small-business-survive-great-resignation-muzik-phr-shrm-cp?trk=articles_directory)
[vi] The Great Resignation is Hitting These Industries the Hardest. (https://fortune.com/2021/11/16/great-resignation-hitting-these-industries-hardest/)
[vii] Employee Benefits in the Hospitality Industry in the US: Inhospitable for Employees? (https://www.researchgate.net/publication/227410165_Employee_Benefits_in_the_Hospitality_Industry_in_the_US_Inhospitable_for_Employees); Retirement Savings Trends. (https://www.adp.com/tools-and-resources/adp-research-institute/research-and-trends/~/media/RI/pdf/Retirement%20Savings%20Trends.ashx)
[viii] 4 in 5 Employees Want Benefits or Perks More Than a Pay Raise; Glassdoor Employment Confidence Survey. (https://www.glassdoor.com/blog/ecs-q3-2015/)
[ix] Why retirement benefits are critical to hire and retain talented employees in remote Covid era. (https://www.cnbc.com/2020/09/10/retirement-benefits-more-critical-to-employees-in-remote-covid-era.html)
[x] US labor market inches back from the COVID-19 shock, but recovery is far from complete. (https://www.pewresearch.org/fact-tank/2021/04/14/u-s-labor-market-inches-back-from-the-covid-19-shock-but-recovery-is-far-from-complete/)
[xi] Financial Wellness Could be Key to Reducing Employee Turnover. ( https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/financial-wellness-could-be-key-to-reducing-turnover.aspx)
[xii] Interview with Angela Antonelli on December 20, 2021.
[xiii] The Year Ahead: COVID-19’s Impact on the Employee Benefits Value Proposition. (https://www.jdsupra.com/legalnews/the-year-ahead-covid-19s-impact-on-the-19430/)
[xiv] Interview with Mark Herbert on January 10, 2022.
[xv] Secure choice plans chugging along despite pandemic. (https://www.pionline.com/gap1)
[xvi] Publicly available reporting on program participant activity made provided by the California, Illinois and Oregon programs. Calculation based upon partial or full withdrawals made against accounts with funded balances.
[xvii] Great Expectations, by Charles Dickens.
This piece was featured in the January 13, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
