How public and private retirement plans can complement each other: Q&A with John Scott
The ways in which public and private sectors can work together on big issues like Americans’ retirement security has been an ongoing discussion for years. Over the last decade, the public sector’s involvement has markedly increased as many states have established state-run Auto IRAs to help small business employees gain access to low-cost, tax-benefitted retirement plans. How has the private sector responded? That is a question a new report from The Pew Charitable Trust sought to answer.
John Scott, director for Pew’s retirement savings project, led the new report published in June 2021, finding that statewide savings programs could be encouraging businesses to sponsor their own programs. We spoke with Scott about the report and what it means for the future of retirement plans.
The views and opinions expressed in this interview do not necessarily represent the policies and positions of Guideline. The content of this interview is for informational purposes only, and should not be interpreted as tax, investment, financial, or other advice.
Guideline: Your new report sheds light on the ability for public and private retirement plans to sit side by side in the marketplace. What was the original concern or question that prompted this research?
Going back a few years to when we focused on what states could do to boost retirement savings, we were concerned about the effect of a public intervention on the private sector market for retirement plan services and products. Going to conferences, we had heard the fear that state programs might, for example, cause employers to drop their retirement plans and enroll their workers in the state program. For employers without plans, we wondered how they might view state programs relative to private market offerings such as 401(k)s.
In 2016, we did a national survey of owners of small to mid-sized businesses, both plan sponsors and employers without plans. We found, in a nutshell, that plan sponsors were not going to drop their plans, and the survey also showed that 52% of employers without plans would start their own plan instead of joining the state auto-IRA. But survey responses are not always reliable, so we were eager to dig into Form 5500 data, the annual filings of retirement plans, to see what employers were actually doing in the states with auto-IRAs.
Guideline: The findings show that “in states that have created what are known as auto-IRAs, employers with plans continue to offer them and businesses without plans are still adopting new ones at similar or higher rates than before the state options were available.” What explains this uptick?
Well, ideally, we’d ask employers directly as to their motivations, but we cannot, at least not yet. Instead, we look to research to come up with some likely explanations. Going back to Pew’s prior survey of employers, as well as work by others, we tried to dig into when and why employers offer retirement benefits. Not surprisingly, perhaps, but employers don’t start retirement plans when they start their business. Benefits of more immediate need like health insurance tend to get adopted first with other benefits like retirement plans usually offered after the firm has grown in terms of employee size and achieved some financial stability.
When a state adopts an auto-IRA, we think there is a subgroup of employers in that state who are in position financially to adopt a plan but just had not gotten around to making that decision. Auto-IRA enactment therefore nudges employers who’ve been thinking about 401(k)s to make the decision to adopt a plan. And financial firms seem to know this, too: We’ve heard anecdotally that service providers have been marketing in the auto-IRA states to the effect of, ‘wouldn’t you rather have a 401(k)?’
Guideline: What implications do these findings have more broadly for the rollout of additional auto-IRA programs in more states? Is there also a role for private-sector companies (e.g. recordkeepers) to offer competitive auto-IRA products?
The big takeaway is that auto-IRAs complement the existing, voluntary employer-sponsored retirement plan market, which will encourage more state programs. When employers are not able or ready to adopt their own plan or when the market is not offering products that employers can adopt, auto-IRAs help fill that gap in the market and enable the employer to provide a retirement benefit and help workers start saving earlier in their careers than if they had to wait for a job with a retirement benefit. When the firm is ready, it can leave the auto-IRA program and adopt a 401(k) with the higher contribution limits, availability of an employer match, and greater choice in investments. I see auto-IRAs as an important part, but not the only part, of a larger system of retirement security.
And there is a role for private companies to offer competitive auto-IRAs. At the end of the day, the goal is to get people saving whether through a 401(k), a state auto-IRA, or a privately offered auto-IRA. Almost by necessity the states have to offer a bare-bones product, at least at the outset. But employers who cannot adopt their own, customized plan would still like some choice that might respond to their needs as business owners and the needs of their workforce. In my view, more products or competition encourages innovation and hence better outcomes. I am sure the policy makers who are running these programs would agree and would welcome some competitive products if those products lead to expanding access and boosting retirement security.
Guideline: We always like to know what people are reading or listening to — any recommendations to share with our audience?
I am currently reading Emperor of All Maladies by Siddhartha Mukherjee, a terrific and well-written, almost lyrical, history of cancer and the effort for a cure. I listen to a lot of podcasts, but an enduring favorite is “99% Invisible,” a podcast about design in all its manifestations – from cities to flags to license plates, even how emails detailing Enron’s collapse spurred new technologies. I have many Spotify playlists. My last addition to a playlist was ‘Volunteers’ by Jefferson Airplane, specifically the 1969 live version at the Filmore East, captured on the album Sweeping Up the Spotlight – The Airplane was not always consistent in its live performances but this version is a keeper.
Special thanks to Catherine New for her help on this article.