Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage
Released: 2015-09-29T00:00:00

Letter

Background

Workers have a variety of options to save for retirement. While personal savings accounts and home equity can be used in retirement, many workers who save for retirement do so in tax-advantaged accounts available through their workplace. Their employers may sponsor an employee benefit plan, such as a 401(k) plan, or make arrangements for employees to contribute to Individual Retirement Accounts (IRAs), such as payroll deduction IRAs, to help employees save for retirement. (See table 1.)

Workers may also choose to save on their own in an IRA to increase their retirement savings. However, our recent work shows that approximately 95 percent of money contributed to traditional IRAs in 2008 was from rollovers, primarily from employee benefit plans.

Despite the various options available for employers to offer a workplace retirement savings program, our prior work and other research shows a persistent gap in coverage among private sector workers. While estimates of participation rates can vary depending on the nature of the study sample (e.g., whether it includes full and part-time workers or is based on household or firm-level data), research consistently indicates that many workers do not participate in a workplace retirement savings program. For example, one study using household data from the Current Population Survey (CPS) shows that the participation rate of private sector workers has declined slightly from about half of full- and part-time workers in the late 1990s to 43 percent in 2012. Similarly, another study using CPS data found that the participation rate among private sector workers ages 21 to 64 has fluctuated over the time period from 2000 to 2012 from a high of about 47 percent in 2000 to a low of about 39 percent in 2012. In addition, a study using firm-level data from the 2014 National Compensation Survey reports that 48 percent of private sector workers participate in a retirement plan.

Efforts to Expand Workplace Retirement Savings Program Coverage in the United States

The President and some members of Congress have proposed various efforts over the years to expand workplace retirement savings program coverage among private sector workers. These efforts generally strive to overcome obstacles for employers to offer workplace retirement savings programs or for workers to participate. In particular, our prior research found that small employers may be reluctant to offer these programs because of administrative burden and potential fiduciary risk. Some workers, on the other hand, may lack the financial literacy or resources to participate.

Automatic Enrollment

To foster retirement saving among the portion of the workforce who have been offered an employee benefit plan but do not participate, some employers have adopted automatic enrollment policies for their defined contribution plans. Under automatic enrollment, eligible workers are enrolled into the plan, unless they explicitly choose to opt out, as opposed to the more traditional method in which workers must take action to join a plan. Employers who have adopted automatic enrollment must also establish default contribution rates and default investment vehicles for workers who do not specify these choices. Employers may also adopt automatic escalation policies, which increase contribution rates on a predetermined schedule—even without active decisions by employees— typically up to a pre-defined maximum contribution rate. The Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA) were amended by the Pension Protection Act of 2006 (PPA) to facilitate the use of automatic enrollment, and Department of Labor (DOL) and the Department of the Treasury (Treasury) promulgated implementing regulations.

Saver’s Credit

To encourage low- and middle-income individuals and families to save for retirement, the IRC was amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 to allow a credit against federal income taxes of up to $2,000 for qualified retirement savings. Eligibility for the Saver’s Credit is based on workers’ adjusted gross income (AGI) and contributions to employee benefit plans and IRAs with the credit phasing out at certain income limits, depending on the size of the household. Since the adoption of the Saver’s Credit, bills have been introduced to further encourage low-income workers to save for retirement, including making the tax credit refundable and increasing the rate of the tax credit for retirement contributions.

In January 2014, the President directed Treasury to create the My Retirement Account (myRA) program, a new retirement savings account for Americans looking for a simple, safe, and affordable way to start saving. Individuals who voluntarily open myRA accounts will be able to set up recurring payroll deduction contributions that will be invested in nonmarketable retirement savings bonds only available to participants in the program. The savings bond is backed by the Treasury, will not go down in value, and will earn interest equal to the rate of return provided in a fund offered in the federal employee retirement plan. The retirement savings bonds will mature at the earlier of 30 years from the date the bond is first issued or when the total value of the bond reaches $15,000. At that time balances will be transferred to a private-sector Roth IRA. Participants are not charged fees for myRA accounts—administrative costs are paid by the Treasury. myRA accounts follow Roth IRA rules, so contributions are made with after-tax income but may be withdrawn tax- free at any time. Moreover, not all Americans will be eligible to participate due to IRA contribution limits based on modified adjusted gross income. Unlike some commercial IRA accounts, myRA does not impose minimum balance or minimum contribution requirements—individuals will be able to open accounts with no start-up cost and can choose to automatically contribute any amount each payday.

Legislative Proposals

Members of Congress have also introduced bills over the years to foster retirement savings among those who work for employers that do not sponsor employee benefit plans. One group of proposals would establish “automatic IRAs” for workers not covered by an employee benefit plan. Under an automatic IRA, employers would be required to make available an arrangement in which employees would be automatically enrolled and contributions would be made through automatic payroll deduction, with an opt-out provision for participants. In addition, some bills would allow for more widespread adoption of multiple employer plans by enabling employers without a common interest to sponsor such plans. Appendix III provides a description of the bills we identified.

Federal Regulation of Employee Benefit Plans and Individual Retirement Accounts

In the United States, employers are generally not required to provide employee benefit plans, including pension plans, to any employees. When they do, however, employee benefit plans are generally regulated at the federal level, providing employers with largely uniform nationwide standards. Most significantly, plans are subject to the requirements of ERISA, which are generally enforced by DOL’s Employee Benefits Security Administration (EBSA) and various provisions of the Internal Revenue Code (IRC), which is enforced by the Internal Revenue Service (IRS). ERISA was enacted to, among other things, protect the interests of plan participants and their beneficiaries and set minimum standards for most private sector pension plans, including rules for fiduciary conduct and prohibited transactions. The IRC and ERISA define prohibited transactions and list exemptions to them. In addition DOL may grant exemptions. To carry out its responsibilities under ERISA, EBSA promulgates regulations and issues various forms of guidance. The IRS is primarily responsible for ensuring that plans meet certain requirements for tax-favored treatment.

ERISA and relevant provisions of the IRC establish minimum requirements and standards for private-sector employee benefit plans. ERISA establishes minimum participation, vesting, and funding standards for plans. For example, ERISA limits the age and the length-of-service that employers can require employees to meet to be eligible for a plan. To qualify for tax benefits under IRC, plans must also meet minimum participation, vesting, and funding standards. An employer may also establish a plan that excludes certain groups of employees as long as the ERISA and IRC requirements are met. For example, an employer may establish and maintain a plan that excludes workers in certain job categories or geographic locations.

Lastly, IRS is responsible for enforcing IRA tax requirements but IRS and DOL share responsibility for overseeing prohibited transactions relating to IRAs that are not ERISA-covered plans.

ERISA Preemption

ERISA includes a provision stating that ERISA supersedes any and all state laws as they “relate to” any employee benefit plan covered under ERISA. This ERISA preemption provision has a relatively small number of exceptions and reflects a policy judgment that nationwide uniformity respecting employee benefit plans outweighs the value of state differentiation. In addition to statutory provisions, “state laws” encompasses decisions, rules, regulations, and any other state action having the effect of law.

Based on statutory interpretation and its review of the legislative history of ERISA, in 1983 the Supreme Court held that a state law “relates to” an employee benefit plan and is preempted “if it has a connection with or reference to such a plan.” The Court has emphasized that state law may be preempted even if not specifically designed to affect such plans. Furthermore, even if a state law is not in conflict with ERISA but is, in fact, consistent with it because, for example, it promotes retirement security, it is not spared from ERISA preemption if it “relates to” an employee benefit plan. The broad scope of ERISA’s preemption provision has permitted large employers to provide pension plans to their employees without having to establish multiple plans or plan policies depending on differing requirements from state to state. In addition, ERISA’s preemption provision helps to ensure that participants are protected by several safeguards. For example, ERISA establishes minimum participation and vesting standards, imposes fiduciary duties on plan sponsors, and authorizes DOL to enforce its requirements.

A 1995 Supreme Court case, however, raised some question regarding the Court’s prior attempts to construe “relate to” and the expansiveness of ERISA. Furthermore, in 2010 a federal appeals court appeared to limit the scope of ERISA preemption when it upheld a local law requiring, among other things, that covered employers make a certain level of health care expenditures on behalf of their employees.

Gaps in Access Leave Many Low- Income and Other Workers without Workplace Retirement Savings Program Coverage

About half of private sector workers did not participate in a workplace retirement savings program in 2012. While some workers chose not to participate, we found that most workers who did not have coverage lacked access to such programs. Among those not participating, the majority worked for an employer that did not offer a program or they were not eligible for the programs that were offered. In particular, lower income workers and those employed by smaller firms were much less likely to have access to programs, after controlling for other factors. In addition to lacking access, certain workers, such as lower income, service sector, and younger workers, were also less likely to participate in programs even when provided access. However, the majority of these workers participated when they had workplace access.

Lack of Coverage Is Driven by Gaps in Access

Roughly half of private sector workers participate in a workplace retirement savings program, according to 2012 data. Specifically, self- reported SIPP data indicate that 45 percent of all private sector workers were participating in a program. However, prior research using SIPP data linked with W-2 tax records has shown that some individuals under- report their participation. To address this issue, we examined similarly linked data to correct for under-reporting and the resulting participation rate increased to 54 percent (see fig. 1). While the W-2 adjusted data show a moderate increase in participation, both measures indicate that many workers lack coverage in a workplace retirement program. Our findings are similar to estimates from our prior work and other studies. For example, the prior research that linked 2006 SIPP data with W-2 tax records shows, using this approach, that the measure of participation among private sector workers increased from 45 percent to 58 percent. A more recent update to this study found that participation further increased to 62 percent in 2012, although the age range of this study differed from our work—this study examined private sector workers ages 21 to 64, while we focused on private sector workers ages 18 and over. Other more recent data from the 2014 National Compensation Survey, a firm level survey conducted by the Bureau of Labor Statistics, show that 48 percent of private sector workers participated in a retirement plan.

Among workers who are not participating, we found that the gap in coverage is mainly due to a lack of access rather than a failure to participate. The vast majority of workers who do not participate–84 percent—reported they did not have access to a workplace retirement program. Access depends on two essential factors: (1) The employer must offer a program, and (2) the worker must be eligible to participate (see fig. 2).

Of these two factors, we found that the lack of access was primarily due to employers not offering a retirement program. Specifically, among those who do not participate, 68 percent reported they worked for an employer that did not offer a program, and another 16 percent reported they were not eligible for the program their employer offered (see fig. 3). Only 16 percent of those who did not participate reported being eligible and not participating.

Lower Income Workers and Those Employed by Smaller Firms Are Much Less Likely to Have Coverage

Certain types of workers, such as those with lower incomes, are much less likely to have coverage compared to other workers. Lower-income workers, in particular, are much less likely to have access to workplace retirement programs and to choose to participate when programs are available. Compared to workers in the lowest income quartile, our analysis found workers in the highest income quartile were nearly 4 times as likely to work for an employer that offers a program, after controlling for other factors. The gap in access exists across the income distribution and is even larger when it comes to eligibility—workers in the third and fourth quartiles were, respectively, 4.4 and 7.5 times as likely to be eligible for a program offered by their employer than workers in the lowest income quartile. In addition, lower-income workers had a lower likelihood of participating even when they were eligible (see fig. 4).

The combined effects of lower access and lower participation result in large gaps in coverage across income groups (see fig. 5). Overall, approximately 14 percent of workers in the lowest income quartile participated in a program compared to 57 percent and 76 percent of those in the third and fourth income quartiles, respectively. Similarly, according to the W-2 adjusted data, 22 percent of workers in the lowest income quartile participated in a program compared to 67 percent and 84 percent of those in the third and fourth income quartiles.

In addition to income, working for a small or mid-size firm is one of the most important factors associated with a lack of coverage. In particular, workers at smaller firms were much less likely to have coverage than workers at larger firms because their employer did not offer a program. Workers at the largest firms were more than 9 times as likely to have an employer that offered a program compared to those who worked for firms with 50 or fewer workers, after controlling for other factors. Even outside the smallest firms, the difference in the likelihood of an employer offering a program was considerable when comparing mid-size and larger firms (see fig. 6). As we have previously reported, smaller firms face challenges in offering programs, such as the perceived complexity and risk of establishing and administering a program. Moreover, smaller and newly formed firms have higher rates of “churn”—business formation and dissolution—and are less likely to offer a program initially. Certain characteristics associated with small employers may also contribute to the challenges of starting and maintaining a program. For example, small employers are more likely to encounter higher rates of worker turnover. In addition, small employers’ operating revenue can be uncertain from year to year.

Outside of whether an employer offers a program, firm size had little to no effect on eligibility or participation. Workers at small or mid-size firms that offer a program were just as likely to be eligible as workers at larger firms with up to 1,000 workers, after controlling for other factors. And workers at the largest firms—more than 1,000 workers—were only slightly more likely than workers at the smallest firms—50 or fewer workers—to be eligible. Similarly, among those who were eligible, workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms, although this effect was only statistically significant using the W-2 adjusted data. Overall, about 23 percent of workers at firms with 50 or fewer workers participated in a program compared to 60 percent of workers at firms with more than 1,000 workers. Corresponding participation rates from the W-2 adjusted data were 31 percent and 68 percent, respectively.

In addition to income and firm size, other characteristics were also significantly associated with whether a worker has coverage, after controlling for other factors. For example:

Part-time: Part-time workers were less likely to have coverage, primarily due to a lack of access. Specifically, compared to part-time workers, full-time workers were about 2.6 times more likely to be eligible for a program offered by their employer. Full-time workers were also more likely to work for an employer that offers a program, but the difference in likelihood was considerably smaller—by a factor of 1.2. Among those who were eligible, full-time workers were only slightly more likely to participate than part-time workers; however this result was not significant using the W-2 adjusted data.

Occupation: Workers in management, business, science, and arts occupations were nearly twice as likely to work for an employer that offers a program compared to workers in service occupations. Those in service sector occupations were also less likely to participate in programs when they had access. However, occupation was not associated with whether workers were eligible for programs offered by their employers.

Age: Compared to older workers, younger workers were generally less likely to be eligible for a program and to participate when eligible.

For example, among those eligible, workers ages 18 to 24 were roughly one-half as likely to participate as workers ages 25 to 34. This pattern holds when comparing progressively older age categories of workers with younger workers, with the exception of workers ages 65 and older. Workers ages 65 and older were less likely to have access to a program compared to workers ages 25 to 34, but were no less likely to participate if they were eligible.

Given Access, Most Workers Participate

Among workers who are least likely to participate—such as lower income, service sector, and younger workers—the majority did so when they had workplace access. The share of workers in the lowest and 2nd income quartiles who participated when eligible was 63 percent and 74 percent, respectively (see fig. 7). Corresponding figures from the W-2 adjusted data were 68 percent and 79 percent. Similarly, the participation rate for eligible service sector workers was 70 percent (74 percent according to W-2 adjusted data). Among the categories of workers we examined, the lowest participation rate among eligible workers was for those ages 18 to 24, but still more than half, 54 percent, participated (59 percent according to W-2 adjusted data).

States and Other Countries Use Similar Key Strategies to Expand Retirement Coverage

States and Countries We Reviewed Often Combine Workplace Access, Automatic Enrollment, and Financial Incentives

In the six states we studied, proposals were made and, in some, laws enacted in an effort to expand coverage that would combine workplace access to a retirement savings program with automatic enrollment and financial incentives —an approach that has helped increase worker participation in countries we studied. For example, the United Kingdom (U.K.) implemented reforms that require private sector employers to automatically enroll eligible workers in a workplace retirement savings program, allowing workers to contribute to individual accounts and receive financial incentives in the form of employer contributions and tax preferences. A government study published in March 2015 found that since implementation of these reforms began in October 2012, various stakeholders generally perceived them as successful to date by bringing millions of new people into retirement savings programs, with significantly fewer individuals opting out than predicted. In fact, the government reported that by the end of 2014 more than 5 million workers had been automatically enrolled and only 12 percent of workers had opted out in 2014. Similar to the U.K. and other countries, state efforts we reviewed in the United States would use a range of approaches to combine workplace access, automatic enrollment, and financial incentives to expand coverage.

Workplace Access

The six state efforts we reviewed would expand workplace access for uncovered workers in two ways. Some of the states are encouraging small employers to offer workplace access by creating state-run programs or state-facilitated marketplaces by which employers can voluntarily offer workers access to a retirement savings program and payroll deduction. For example, Massachusetts is developing a state-run 401(k) plan that not-for-profit employers with fewer than 20 employees in the state can adopt. Similarly, Washington plans to create a state-facilitated marketplace that would list a variety of qualified providers from which employers with fewer than 100 employees could choose to offer their workers. Laws or bills in other states, such as California, Illinois, and Maryland, would require employers with more than a certain number of employees, and which do not already offer an employee benefit plan to make their payroll systems available for workers to contribute via payroll deduction. To ensure these employers are able to find a reasonable option to meet this requirement, these states would create state-run programs. (See table 2.)

State stakeholders told us that state efforts to expand coverage in workplace retirement savings programs were designed to provide workplace access because research and experience by employee benefit plans in the United States has shown that workers are more likely to save for retirement if their employer offers a retirement savings program. DOL and the Small Business Administration (SBA) note that payroll deduction—an amount of salary taken from a worker’s paychecks— allows workers to save smaller amounts each pay period instead of waiting until the end of the year to set aside money in an IRA. And a study prepared for SBA concluded that the biggest step small employers could take to increase worker retirement savings was to offer them access to a plan. Workplace access enables workers to take advantage of payroll deduction for retirement savings. Federal and state officials and state stakeholders noted that using payroll deductions makes contributing easy for most workers, helping them develop a habit of saving.

The countries we reviewed have also taken steps to encourage or require employers to provide workplace access for uncovered workers that use similar approaches as state efforts (see fig. 8). As part of the U.K.’s effort, the government created the National Employment Savings Trust (NEST) to provide employers with a reasonable option to meet the requirement to provide workers access. This approach is similar to efforts in California, Illinois, and Maryland, and to some state efforts without an employer requirement that still create a state-run program, such as Massachusetts and West Virginia. In addition, New Zealand and Canada would encourage or require certain employers to offer workplace access.

Instead of creating a state-run program for employers, though, New Zealand and Canada license service providers to offer programs that meet established criteria—an approach similar to the marketplace in Washington State.

In combination with workplace access, each of the six state efforts we reviewed would require or allow employers to automatically enroll workers in a workplace retirement savings program to increase participation. Specifically, efforts in California, Illinois, and Maryland would require eligible employers that do not offer an employee benefit plan to automatically enroll their workers in the state-run program. In addition, state officials told us that the program for not-for-profit employers in Massachusetts would require employers who adopt the state plan to use automatic enrollment. In each of these programs, workers would have the ability to opt out. For example, California’s Secure Choice program would require that employers enroll workers, but an official said workers would have a 90-day opt out period. In West Virginia, on the other hand, employers who would sign up to participate in the state-run program would have the option of automatically enrolling their workers, but it is at the employer’s discretion. Similarly, Washington would provide an online marketplace with multiple vehicles—a SIMPLE IRA, payroll deduction IRA, and myRA—and employers that choose to use the marketplace would be encouraged, but not required, to automatically enroll workers.

State officials and stakeholders emphasized the importance of automatic enrollment in increasing participation and contributions, which can, in turn, help reduce costs. For example, in California, members of the Secure Choice program’s board said that automatic enrollment helps increase participation and promote better outcomes by nudging workers to save. A representative from the Maryland task force also said that without automatic enrollment fewer workers would participate, and the burden to provide financial education would increase. Similarly, our prior work and other research show that automatic enrollment is effective in overcoming workers’ inertia and considerably increases participation. For example, we previously found that automatic enrollment has considerably increased participation in programs adopting this feature, with some participation rates reaching as high as 95 percent. In addition to expanding participation, state officials and stakeholders we interviewed said that automatic enrollment can reduce the costs of managing programs as the overall amount of savings increase.

Government officials and stakeholders in the countries we reviewed also emphasized the importance of automatic enrollment in increasing participation. According to the former Retirement Commissioner in New Zealand, automatic enrollment has been essential to the success of their KiwiSaver program and, without it, they would need a massive education campaign. Similarly, other government officials in New Zealand said that automatic enrollment is critical because too many people—even those who want to save—will not actively seek out participation. Government officials and stakeholders in the U.K. and Canada also highlighted the importance of automatic enrollment in increasing participation. According to a report to Parliament submitted by the largest organization representing unionized workers in the U.K., initial opt-out rates have been lower than expected, and their experience has shown the value of harnessing inertia to improve outcomes for workers. Moreover, the program was designed to further reduce opt-outs because it requires automatic re-enrollment of those who opted-out after 3 years. Government officials in Canada said that the PRPP program utilizes automatic enrollment to increase participation, but it is unclear how successful it will be because the program is voluntary for employers.

Financial Incentives

While all six state efforts we reviewed anticipate using tax-advantaged vehicles to encourage participation, state officials and others said Roth IRAs, in particular, could help partially address concerns over limited tax benefits for lower-income workers. Financial incentives for participation in retirement savings programs include preferential tax treatment and employer contributions and multiple stakeholders noted that such incentives encourage worker participation. The state efforts we reviewed all seek to incentivize participation by using vehicles—employer- sponsored 401(k) plans or workplace-based IRAs—that typically qualify for preferential tax treatment. But they do not allow for other financial incentives, such as employer contributions, or do so only to a limited extent. In the absence of other financial incentives, some states, such as Illinois and California, are using or considering a Roth IRA vehicle to address concerns that lower-income workers may realize little or no current tax benefit from savings. Treasury officials and stakeholders said a Roth IRA may be beneficial for workers who have little or no current tax liability but may pay higher taxes in the future. Moreover, Treasury officials said that Roth IRAs can benefit workers with limited resources by allowing them to withdraw contributions tax free under certain circumstances. In light of these issues, Illinois enacted the Secure Choice program, which uses a Roth IRA vehicle, and California’s Secure Choice board commissioned a feasibility study to examine this issue.

Government officials and stakeholders in the countries we reviewed pointed to the importance of additional financial incentives, such as employer and government matching contributions, in increasing participation. For example, New Zealand’s KiwiSaver used a one-time “kick-start” contribution of $1,000 New Zealand Dollars (NZD), about $650 U.S. dollars (USD), as well as matching employer contributions and tax benefits, as financial incentives to encourage worker participation in the program. The former Retirement Commissioner in New Zealand and other stakeholders noted that the kick-start has been very popular and effective because it is so easily understood by participants, while the tax incentive is less well-understood. Government officials attributed the higher than expected rate of participation, particularly for those opting in to KiwiSaver, to the success of the financial incentives. Similarly, in the U.K., the automatic enrollment requirement includes matching contributions from the employer and government—employers are currently required to contribute 1 percent for a specified range of earnings, which will gradually increase to 3 percent in 2018, while the government contribution will increase from 0.2 percent to 1 percent. One academic noted that these matching contributions are very important for low-income workers who can only afford a modest contribution rate.

States Can Learn from Other Countries’ Experiences Implementing another Key Strategy— Simplifying Administration and Investment Management

In addition to the key strategies discussed above, state efforts would take steps to simplify the overall design and implementation of their programs to reduce employer burden and complexity for workers. Specifically, in order to mitigate some of the challenges of setting up workplace retirement savings programs, state officials seek to (1) limit the responsibility and cost for employers, and (2) reduce complexity, cost, and investment risk for workers. These efforts would simplify program administration and investment management with the goals of lowering fees and encouraging broad employer adoption and worker participation. However, state officials also noted that this may elevate the role of the state in administering these programs and create implementation challenges, including how to fund them. Since no state effort has been implemented to date, states may be able to draw lessons from experiences in the countries we reviewed, as well as other state programs. (See appendix II for a full description of the actions states and other countries have taken to reduce administrative burden and cost for employers.)

To reduce administrative burden and cost for employers, states plan to take a number of actions that could offload or help employers with typical employer duties in workplace retirement savings programs (see fig. 9).

Other countries have taken similar steps to reduce administrative burdens and costs for employers. For example, the U.K. government created NEST to ensure that all employers, particularly small employers, would have access to a low-cost program, with the added benefit of diminishing the burden on employers of choosing an appropriate provider. NEST stakeholders said the existence of a low-cost program with a universal public service obligation reduces the burden on small employers who might otherwise expend considerable time and effort in identifying a provider willing to serve them at an acceptable cost. Among other things, NEST’s governing board selects and monitors providers, takes on fiduciary liability for management of the program’s investments, and does not charge employers to set up and use NEST. Lastly, NEST is responsible for sending out welcome packages to new participants with information on how to access the website and create accounts.

In addition to addressing challenges for employers, state and country efforts we reviewed address issues of complexity, cost, and investment risk for workers through a variety of approaches (see table 3).

While Implementation of State Efforts Would Likely Increase Coverage, Some Private Sector Workers May Remain Uncovered

While successful implementation of these efforts by states will likely increase coverage for many private sector workers, some workers in those states may remain uncovered. In particular:

Workers at employers that continue to not offer access to a workplace retirement savings program: While all the states that we reviewed would allow small employers of varying sizes and self- employed workers to choose whether to offer access to the state program to avoid creating a burden for these employers, many stakeholders felt this would leave some key worker populations uncovered. For state efforts that would create a voluntary program for all employers who are eligible to offer it to their workers, such as Massachusetts’ not-for-profit program, stakeholders said many employers would still likely not choose to offer workplace access. Specifically, one national industry representative said, by definition, the employers targeted by state programs have already chosen not to offer retirement programs to their workers. Similarly, state and national stakeholders felt that the absence of a requirement for employers to offer workers access to workplace retirement savings programs would significantly lessen any expansion of coverage. Yet even those state efforts that would require eligible employers to offer workplace access, such as Illinois’ and California’s Secure Choice programs, would apply only to employers above a certain employee size threshold, 25 and 5 employees, respectively. According to one academic, there could be many employers under that size threshold. In addition, there are many self-employed workers who may continue not to have access to a workplace retirement program. For example, while California’s target population is 6.3 million workers who lack access to an employer-sponsored plan, California Secure Choice board members estimated that there are an additional 2 million uncovered Californians who are contractors or self-employed. For this reason, California officials said that the Secure Choice program may allow self-employed workers to opt in.

Ineligible workers: National industry stakeholders said that the state efforts would not cover some of the traditionally ineligible populations—including part-time and temporary workers—at employers that already offer qualifying employee benefit plans. Some state efforts that would require employers of a certain size to offer workplace access, such as California and Illinois, exempt those employers that already offer employee benefit plans, for which existing law allows employers to determine which populations are eligible. By contrast, Maryland’s proposed program would cover workers who are ineligible for the employee benefit plan offered by their employer, but only if the employer has 5 or more workers eligible for the state program.

Workers who choose not to participate: Since none of the state efforts we studied would require workers to contribute—all of these efforts allow workers to either opt in or opt out—some workers will choose not to participate. As noted above, state efforts that would require the use of automatic enrollment will likely achieve broader increases in participation than efforts that allow workers to choose whether to opt in. For example, one industry study found that 41 percent of those surveyed postponed saving for retirement in order to pay down student loan debt. In addition, a member of the California Secure Choice board said that some workers may not understand the value of earning investment returns on savings. To help address this, a California official said that the marketing materials for Secure Choice would need to clearly explain the benefits of participation.

Workers with very low earnings who cannot afford to participate: Several stakeholders noted that it may be difficult for very low income workers to afford contributions. For example, a representative from the California Secure Choice board said that lower income workers may need the money for more immediate expenses. Our prior work indicates that while Social Security retirement benefits replace a higher percentage of earnings for lower income workers, this alone may not ensure an adequate retirement income. In Canada, a representative of an association representing program providers said that the PRPP program is targeted to middle income workers, while lower income workers who are eligible for other federal government income supplements in retirement. Moreover, a representative of an employer group noted that the government is motivated to provide programs to ensure a minimum level of income in retirement because Canadian provinces assume responsibility for the welfare of their citizens, and increased purchasing power can have a positive impact on the overall economy. In particular, outside of PRPP, Canada provides a targeted benefit, Guaranteed Income Supplement, which supplements the Canadian universal Old Age Security program to ensure low income seniors have a minimum level of income in retirement.

States Face Potential Challenges with Legal Uncertainties That Could Delay or Deter Their Efforts to Expand Coverage without Federal Action

States face legal uncertainty that could result in legal challenges in connection with efforts to expand coverage in workplace retirement savings programs for private sector workers, which will continue if no action is taken by Congress or relevant agencies, including DOL and Treasury. For over a decade legal uncertainty has influenced the design of state efforts. More recently, four of the six states we studied have enacted legislation to increase coverage in workplace retirement savings programs and legislators in other states have introduced similar bills or have studied potential solutions to expand coverage. However, state and national stakeholders said these efforts face potential challenges because of legal uncertainties created by existing federal law—ERISA—and various agency regulations, depending on the type of program state efforts intend to create (see fig. 10).

While stakeholders noted multiple issues causing legal uncertainties for state efforts, the most prevalent and pervasive was ERISA preemption. Specifically, ERISA preempts, or invalidates, any and all state laws that “relate to” any private-sector employee benefit plan. Generally, the “relate to” provision in ERISA could be applicable to state laws that either directly regulate employee benefit plans or, in some cases, only indirectly affect such plans. For example, a state law that mandates the way in which employee benefit plans are administered may be determined to “relate to” such plans and may, therefore, be preempted. In this way, ERISA’s preemption provision enables employers to establish uniform plans and administrative schemes, preventing them from having to comply with different requirements for employees located in different states. Whether ERISA preempts a state law has historically been determined by federal courts, so states may face litigation. One national stakeholder indicated that it might be beneficial for a state to implement a program and go through resulting litigation to resolve some of the areas of legal uncertainty and clear the way for other states to implement similar programs. However, other state and national stakeholders were concerned about the potential consequences for workers and employers should an implemented program later be preempted. Noted implications for employers and workers included that the state program might lose its preferential tax treatment or create risk for employers that choose to offer the programs. Given these implications of uncertainty regarding ERISA preemption, state efforts to expand access to millions of workers and address the retirement savings shortfall may be delayed or deterred.

Based on our interviews with state and national stakeholders and government officials, none of the state efforts we reviewed are immune from legal uncertainty caused by ERISA preemption, but the type of uncertainty differs depending on the details of the state efforts.

Employee benefit plan programs. For states that are attempting to use an employee benefit plan, such as a 401(k) plan or SIMPLE IRA, DOL officials told us that it is unclear whether a state could create a program without being preempted by ERISA because it is unclear what level of state effort would “relate to” employee benefit plans. For example, Massachusetts is the furthest along implementing an effort that would create a 401(k) plan that not-for-profit employers with 20 or fewer employees could adopt, but national stakeholders had mixed opinions about whether its program will be preempted if legally challenged. Among other things, a Massachusetts official said that the state plans to take on administrative responsibilities and oversight of the program’s service providers and will charge employers who choose to offer the program, but employers will still be plan fiduciaries.

Payroll deduction IRA programs. Partly to avoid uncertainty caused by ERISA preemption, four of the six states we examined would create programs using payroll deduction IRAs because by complying with relevant DOL regulations such IRAs are not employee benefit plans and are not subject to ERISA. However, programs relying on payroll deduction IRAs could run into similar preemption uncertainty as state efforts with employee benefit plans because the DOL regulation does not address some key questions. First, the regulation was promulgated primarily to provide guidance to employers and, as DOL officials noted, it does not specify whether a state can offer payroll deduction IRAs to private sector workers. In addition, DOL officials said the regulation does not address whether certain program features states intend to use would cause the programs to be considered employee benefit plans. For example, some states would like to capitalize on the potential advantages of using automatic enrollment for workers and requiring certain employers to offer workplace access to retirement savings programs. If these features cause the programs to be considered employee benefit plans, stakeholders said there would be uncertainty regarding preemption.

To address this uncertainty, state and national stakeholders thought DOL and Treasury should provide guidance and one thought DOL should clarify its regulation on payroll deduction IRAs. On July 13, 2015, the President announced that DOL will propose a set of rules by the end of the year to provide a clear path forward for states to create retirement savings programs. DOL officials said the agency’s role is limited under ERISA without further Congressional action—it can revise and promulgate regulations but there is nothing in ERISA that would allow it to waive preemption for state efforts. In one case, Illinois law explicitly requires the state to request an opinion or ruling from DOL on the status of the program with respect to ERISA before the program can be implemented. An Illinois stakeholder said that the state does not have to wait for a DOL opinion to implement the program, but implementation would stop if DOL sent a letter saying the Illinois program had to comply with ERISA. While Illinois and other states may reach out to DOL for an opinion, in June 2015, DOL officials told us they had not received any such requests. Even if they did, DOL officials said the department does not have a formal process for issuing such opinions, and the opinion would not necessarily be binding in court. As a result, DOL’s opinion may not give states the level of certainty regarding preemption they need to proceed.

Similarly, state and national stakeholders said state experimentation with various approaches could help determine which work best for expanding coverage in workplace retirement savings programs, so some have called for increased flexibility with respect to ERISA preemption. Given the need of many workers to increase their retirement savings, and limitations on DOL’s ability to provide flexibility regarding ERISA preemption, stakeholders have suggested a number of ways to address uncertainty and facilitate state efforts to expand coverage in workplace retirement savings programs:

Amend ERISA’s preemption provision. Some stakeholders suggested Congress could amend ERISA’s preemption provision by adding an exception for state efforts that expand coverage in workplace retirement savings programs.

Pilot program. DOL officials told us a pilot program proposed in the Fiscal Year 2016 President’s Budget Submission, issued February 2, 2015, could help identify actions states could take to effectively expand coverage in workplace retirement savings programs and determine if new, or changes to, DOL regulations or guidance are needed. Under this proposal DOL would select a small number of states to implement different approaches to increasing coverage in workplace retirement savings programs. As part of such a pilot program, DOL officials said the department would need statutory authority from Congress to temporarily waive ERISA preemption for the pilot program timeframe in the selected states. They said some of the appropriations DOL may receive pursuant to the program, should it be authorized, could be used to fund start-up costs for state efforts given the potential implementation challenges noted by states. A key part of the pilot program would also involve data collection on state efforts to provide government and experts an opportunity to see which strategies will actually increase coverage before making more permanent changes to permit state efforts.

Safe harbor. DOL and a national stakeholder said Congress could authorize DOL to establish a regulatory safe harbor for certain state efforts. DOL officials said the pilot program could even be considered a less permanent version of a safe harbor—albeit limited to a small number of states. To address other areas of legal uncertainty under ERISA, Congress has sometimes authorized DOL to prescribe safe harbors setting out conditions under which entities can operate without running afoul of the law. For example, PPA provided for DOL to prescribe by regulation a safe harbor for plans adopting automatic enrollment that, among other things, invest plan contributions in a qualified default investment alternative (QDIA). DOL promulgated a regulation describing the type of investments that qualify as QDIAs.

Other Issues Causing Legal Uncertainty

In addition to the uncertainty caused by ERISA preemption, state and national stakeholders and government officials shared other issues causing legal uncertainty. For example, DOL officials were concerned with states offering payroll deduction IRA programs because they would presumably fall outside of ERISA and DOL regulation. They said the protections provided by ERISA are important for employee benefit plan participants and that DOL has already developed a proven regulatory framework. Stakeholders said other legal uncertainty is caused by conflicting DOL and Treasury policies related to multiple employer plans, and questions about whether certain Treasury regulations allow states to implement a guaranteed return, or pool assets to achieve scale. For these other issues, states will continue to face uncertainty under existing DOL and Treasury regulations (see table 4).

Conclusions

Millions of workers in the United States have little or no retirement savings, an issue exacerbated by the lack of access to workplace retirement savings programs for many of them. Without this coverage, a significant number of Americans face the prospect of financial insecurity in retirement, and federal and state safety net programs face the potential for bearing increased financial burdens. Despite several major changes to federal law during the last few decades, federal action has not spurred such an increase in coverage. Recognizing this need to increase coverage, and thereby increase retirement savings, some states have undertaken efforts that would require or encourage employers to expand access to workplace retirement savings programs. However, the existing framework of federal law and regulation was not designed to foster a state role in providing coverage to private sector workers, and the resulting uncertainties about the application of that framework raise questions about the future and success of such efforts. Changes at the federal level—Congressional action combined with revised regulations and guidance within the authority of relevant agencies, particularly DOL— could help address these uncertainties. These actions would require difficult policy choices and involve weighing the benefits of uniformity and consistency provided by ERISA preemption against the potential value of state efforts to adopt innovative approaches to address the lack of sufficient retirement savings by their citizens. Moreover, along with the known regulatory challenges already identified by state officials and experts we interviewed, other areas of uncertainty could emerge through the experience of states implementing these programs.

Congress has several options for legislative action, each of which highlight some of the difficult policy choices and trade-offs that would need to be considered. For example, amending the ERISA preemption provision to add exceptions for any of the state efforts discussed here would provide states with certainty about which types of efforts they could undertake. It might also set a precedent for additional exceptions that could diminish the nationwide uniformity and stability the preemption provision is intended to create. Alternatively, a pilot program could permit states to test, with DOL involvement, innovative approaches to increasing coverage. However, by their very nature, pilot programs involve a limited number of states and therefore would not create certainty for states not included in the pilot that wish to expand coverage. Pilot programs are generally temporary in nature so even included states may not have the benefit of long-term certainty about the feasibility of their efforts. Finally, through the creation of a statutorily authorized safe harbor, DOL could identify a small number of options available to states that would not run afoul of ERISA’s preemption provision, thereby retaining some degree of ERISA uniformity for employers. However, the development of a safe harbor option that would appeal to states and employers while retaining key protections for workers could be challenging, and little is known about the relative effectiveness of any particular model to actually increase coverage and retirement savings.

Matter for Congressional Consideration

To address the legal uncertainty stemming from ERISA preemption of state laws while maintaining the advantages of ERISA for both employers and workers, Congress should consider providing states limited flexibility to pursue efforts to increase coverage under workplace retirement savings programs. To do this, Congress could, for example, direct or authorize the Secretary of Labor, in consultation with the Secretary of the Treasury, to (1) promulgate regulations prescribing a limited safe harbor under which state workplace retirement savings programs with sufficient safeguards would not be preempted and would receive tax treatment comparable to that provided to private sector workplace retirement savings programs, or (2) create a pilot program under which DOL could select a limited number of states to establish workplace retirement savings programs subject to DOL and Treasury oversight. In either case, any such initiative should ensure that state programs include adequate participant protections and are subject to agency oversight, appropriate reporting requirements, and meaningful evaluation.

Recommendation for Executive Action

To facilitate state efforts to expand coverage in workplace retirement savings programs, we recommend that the Secretary of Labor and Secretary of the Treasury consider their authority and review and revise, if necessary, existing regulations and guidance causing uncertainty for state efforts. For example, the Secretary of Labor could direct the Employee Benefits Security Administration’s (EBSA) Assistant Secretary to revise Interpretive Bulletin 99-1 to clarify whether states can offer payroll deduction Individual Retirement Accounts (IRAs) and, if so, whether features in relevant enacted state legislation—such as automatic enrollment and/or a requirement that employers offer a payroll deduction—would cause these programs to be treated as employee benefit plans.

Agency Comments and Our Evaluation

We provided a draft of this report to DOL, Treasury, the Pension Benefit Guarantee Corporation (PBGC), and the Social Security Administration (SSA) for their review and comment. PBGC and SSA did not provide comments. DOL provided written comments, which are reproduced in appendix VII. DOL also provided technical comments, which we have incorporated where appropriate. Treasury provided oral and written technical comments, which we have incorporated where appropriate. Treasury generally agreed with the findings, conclusions, and recommendation of this report.

In its written comments, DOL generally agreed with the findings and conclusions of the report. They noted that inadequate retirement savings has a detrimental impact on the well-being of older Americans and increases the burden on state and federal retirement income support programs. In addition, DOL noted that many of the states engaged in efforts to address this issue by expanding coverage in workplace retirement savings programs have questions about preemption by ERISA.

DOL generally agreed with the recommendation of the report. To address uncertainty facing state efforts, EBSA is initiating a regulatory agenda entitled “Saving Arrangements Established by States for Non- Governmental Employees,” which will appear in the Fall 2015 Semi- Annual Regulatory Agenda. EBSA expects to publish a Notice of Proposed Rulemaking by the end of 2015. We agree that DOL should review and revise existing regulations and guidance to accomplish all that can be done administratively to facilitate state efforts to expand coverage As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Labor, the Acting Director of the PBGC, the Acting Commissioner of the Social Security Administration, the Secretary of the Treasury, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII.

Appendix I: Objectives, Scope, and Methodology

Our objectives for this study were to examine: (1) recent estimates of workplace retirement savings program coverage, including eligibility and participation, and characteristics of workers who lack coverage, (2) strategies used by states and other countries to expand coverage among private sector workers, and (3) potential challenges states could face given existing federal law and regulations.

To answer our research objectives, we used several different approaches. We examined data on private sector workers. We reviewed relevant research, selected state and federal legislation, and federal laws, regulations, and guidance. In addition, we interviewed state, national, and international industry stakeholders and government officials, including those at the Department of Labor’s (DOL) Employee Benefits Security Administration, the Department of the Treasury (Treasury), the Pension Benefit Guaranty Corporation, and the Social Security Administration (SSA). Section 1 describes the information sources and empirical methods we used to examine workplace access and participation across various characteristics of workers. Section 2 describes the methodology by which we identified state efforts and selected case studies, and reviewed the strategies they use and the potential challenges they could face. Section 3 describes similar methodology for our international review.

Section 1: Examining Estimates of Retirement Program Access and Participation and Characteristics of Workers Who Lack Coverage

To answer this question, we obtained information from the Survey of Income and Program Participation (SIPP) along with taxpayer data from W-2 filings, reviewed relevant literature, and conducted interviews with academics, industry stakeholders, and agency officials.

SIPP is a nationally representative survey conducted by the U.S. Census Bureau. This panel survey is conducted generally every 4 years and resurveys participants every 4 months in a series of “waves” for the duration of their panel. Within each wave, Census administers a core survey consisting of questions that are asked at every interview, and several modules relating to a particular topic. We used data from the core survey and the topical module on retirement and pension coverage fielded from January-April 2012, the most recent data available. The survey collected data on about 52,000 individuals, including detailed information on work history, demographics, assets, and income.

In comparison to other nationally representative surveys, SIPP has several main advantages. First, SIPP collects separate information on defined benefit (DB) and defined contribution (DC) plans. Other surveys, such as the Current Population Survey, do not distinguish between income from and participation in DB and DC plans. Second, the SIPP sample is larger than comparable surveys, such as the Survey of Consumer Finances (SCF). Consequently, it is possible to produce point estimates for demographic subcategories with a higher degree of reliability. Further, in comparison to SCF, which oversamples wealthy households, SIPP oversamples lower-income households—arguably an important component of an analysis of income security.

Despite its advantages, SIPP has two limitations for our analysis. First, as with most survey data, SIPP data are self-reported. This can be problematic for the reporting of data on income sources and retirement program participation. For example, respondents might incorrectly report that they participate in a workplace retirement savings program when they do not. Second, despite the fact that SIPP differentiates between participation in a DB or DC plan, it does not contain full information on whether an individual’s employer offers a DB plan.

Previous research has also found evidence of under-reporting of retirement program participation by comparing self-reported survey responses to W-2 tax records. Specifically, W-2 records include information on contributions to tax-advantaged retirement programs. By comparing the SIPP data to W-2 tax records, researchers can identify under-reporting of program participation. Similar to the approach used in prior research, we worked with Census to create a W-2 adjusted indicator of participation. If a respondent reported they did not participate, but actually had positive contributions to a workplace retirement program reported on their W-2, they were re-classified as participating. The data did not allow us to correct for the possibility that some participants may report they are participating when in fact they did not. Specifically, if the respondent said “yes, they do participate” but there is no contribution evident in the W-2, we did not recode them as a no because we cannot rule out the possibility that their employer offers a defined benefit plan or defined contribution plan in which only the employer contributes.

Data Reliability

We conducted a data reliability assessment of selected SIPP variables by conducting electronic data tests for completeness and accuracy, reviewing documentation on the dataset, or interviewing knowledgeable officials about how the data are collected and their appropriate uses. For the purposes of our analysis, we found the variables we ultimately reported on to be sufficiently reliable.

We compared our estimates to estimates provided by Census using the SIPP data linked to tax records on retirement program contributions. Census replicated our analysis using the public use SIPP data with consistent results. Further, the results of our regression analysis of participation using the self-reported measure in the public use data and the W-2 adjusted measure were very similar in the size and significance of variables included in our analysis.

Methods for Examining Retirement Program Coverage

In our sample we included respondents who are age 18 and older working in private sector jobs. For all SIPP analyses, we used SIPP individual-level weights to compute point estimates. Table 5 provides an overview of the number of private sector workers participating in workplace retirement savings programs using the W-2 adjusted data.

To determine the extent to which private sector workers are covered by workplace retirement savings programs and the characteristics of those who lack coverage, we reviewed relevant literature and interviewed researchers, stakeholders, and agency officials to discuss relevant research methodologies and findings. This review informed our analysis of SIPP and Census data. Specifically, we examined the likelihoods, or odds, of the following outcomes: 1) participating in a retirement program (among all private sector workers), 2) having an employer that offers a retirement program (among all private sector workers), 3) being eligible (among those offered programs), and 4) participating in a program (among those who are eligible). The regression models we used to estimate these likelihoods included variables for the following characteristics of workers: income, occupation, education, age, gender, marital status, race/ethnicity, size of the firm they worked for, whether they worked full-time or part-time, whether they worked for the full year or only part of the year, and whether they were or were not union members. We examined regression results from the SIPP public-use data and the linked W-2 data. As described in the body of this report and appendix VI, the results were very similar in the size and significance of variables included in our analysis for both measures of participation.

Literature Review and Interviews

To understand factors that may be associated with access to workplace retirement programs and inform the methodology for our study, we conducted a literature review. A formal literature search was conducted by a GAO reference librarian using the Proquest database. In addition, we coordinated with the Congressional Research Service and Congressional Budget Office to identify relevant studies, and checked with DOL and SSA officials as to whether they would recommend any additional materials. Finally, during interviews with outside researchers, we asked for recommendations for other noteworthy studies. We performed these searches and identified articles from June 2014 to September 2014.

Our review primarily focused on studies from the last five years (2009- 2014). The team reviewed article abstracts and identified those which were most relevant to our research objectives and developed detailed spreadsheet summaries of study goals, methodology, and findings.

Section 2: Examining Strategies Used in State Efforts to Expand Coverage and the Potential Challenges States Could Face Given Existing Federal Law and Regulations

To review the strategies used in state efforts to expand private sector retirement coverage and the potential challenges they could face given existing federal law and regulations, we compiled a list of recent state efforts and conducted case studies in six states.

List of State Efforts

To provide context on the number and type of recent state efforts we (1) developed a list of recent efforts in 29 states by reviewing industry websites and publications, interviewing federal officials and knowledgeable industry representatives, and conducting targeted searches of legislative databases; (2) confirmed the completeness of the list of states we identified at multiple points during the process with knowledgeable stakeholders; and (3) described the strategies in these state efforts. See appendix IV for a full description of our methodology and results.

State Case Studies

We selected a limited number of state efforts for case studies in October 2014 to provide non-generalizable examples of the types of efforts underway to expand coverage. To do so, we asked officials from DOL and Treasury and representatives from the Pension Rights Center, the American Society of Pension Professionals and Actuaries, and the retirement issues group AARP to recommend “leading” state efforts. They recommended eight states: California, Connecticut, Illinois, Maryland, Massachusetts, Oregon, Washington, and West Virginia. From those eight states, we selected six for case studies based on the following criteria:

States that enacted, or were expected to enact, legislation that leads to implementation of a substantive effort to expand coverage.

Some parity in the numbers of states from each of the two broad categories of state efforts we initially identified—automatic IRA- and other voluntary account-type programs.

State efforts with some differences in how the broad categories were approached.

Based on these criteria, we selected California, Illinois, Maryland, Massachusetts, Washington, and West Virginia. We did not select Oregon because the state’s Retirement Savings Task Force had just completed a study that recommended the program have certain characteristics, but any legislative proposal that might utilize those recommendations would not be available until 2015 at the earliest. We did not select Connecticut because its recent legislation and historical context were similar to other states we selected.

To conduct case studies in the six states, we reviewed applicable GAO and academic research and legislative documentation on each state’s effort. Where available, we reviewed status updates and final reports by the state government or appointed task force or board. In addition, we interviewed national industry stakeholders and academics with knowledge of state efforts, and key stakeholders in the states including, where applicable, elected state officials, state government officials, board or task force members, and employer, worker, and industry representatives. We asked about key features of the state efforts and advantages, disadvantages, and challenges of the strategies in the state efforts. We conducted some of these interviews in person in California, Illinois, and Washington.

Section 3: Examining Strategies Used in Other Countries’ Efforts to Expand Coverage

To examine strategies used by other countries to expand coverage and identify lessons learned for the United States, we studied efforts in three countries that have voluntary workplace retirement systems—Canada, New Zealand, and the United Kingdom (U.K.). Our review provides non- generalizable examples of the types of efforts underway to expand coverage outside the U.S. We conducted an initial review of workplace retirement savings programs in Organisation for Economic Co-operation and Development (OECD) countries and consulted with knowledgeable industry stakeholders at the OECD and World Bank, among others. Given this information, we selected countries that met the following criteria:

Private sector, workplace retirement savings programs are an important pillar of the country’s retirement system.

The country has well-developed financial markets.

Reforms designed to increase coverage have been implemented or are in the process of being implemented.

Reforms use similar strategies as state efforts we identified.

Specifically, the reforms use a voluntary approach or require employers to offer a program but allow workers to opt out.

It was identified through our research and the consensus of knowledgeable external stakeholders as having strong potential for yielding useful lessons for the United States.

It is not duplicative. Where similar programs exist in multiple countries we will select the one that best addresses the other selection criteria.

As part of our review, we examined available documentation and analyzed the selected countries’ systems based on strategies used to increase coverage and the potential effectiveness in the United States. In particular, we examined eligibility and enrollment features, as well as measures targeted to workers who tend to lack coverage (e.g., those who work for small employers or are self-employed). We interviewed knowledgeable industry stakeholders and government officials from each country, as well as academics and national stakeholders based in the United States, about each strategy’s strengths, weaknesses, tradeoffs, and lessons learned for the United States.

We did not conduct an independent legal analysis to verify the information provided about the laws, regulations, or policies of the countries selected for this study. Instead, we relied on appropriate secondary sources, interviews, and other sources to support our work. We submitted key report excerpts to agency officials in each country for their review and verification, and we incorporated their technical corrections as necessary. We note also that the fact that a legal feature was successful in one or more of the countries we visited, which may have significantly different cultures, histories, and legal systems than the United States, does not necessarily indicate that it would be successful in the United States.

We conducted this performance audit from June 2014 through September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Description of Efforts to Simplify Administration and Investment Management of Workplace Retirement Savings Programs

Reducing Administrative Burden and Cost for Employers

Use Employers’ Existing Payroll Processes

States we reviewed would attempt to use employers’ existing payroll processes to reduce administrative burden for employers, but some stakeholders said this may create challenges that could be mitigated based on state experience with other programs. For example, Maryland’s Task Force found that the best way to minimize administrative burden on small employers is to use their existing payroll process. While some stakeholders were concerned with employers’ payroll deduction capabilities, research shows that the majority of employers already use electronic payroll services. Because of this, state and national stakeholders told us that deducting and remitting contributions from a worker’s paycheck would not substantially increase the burden or cost for most employers. However, California stakeholders noted that using employers’ existing payroll processes would create a large state role in educating employers about their responsibilities and collecting payroll deductions. For example, the California Secure Choice program would need to be able to accept contributions from millions of small employers and one stakeholder noted that the program would likely have to deal with privacy issues if employers use tax identification information to remit payments. However, some states hoped to utilize the experience of state agencies that accept payroll deduction for other employer deductions and payments. For example, board members said that the California Secure Choice program may utilize the services of the state’s Employment Development Department that already collects employment taxes from employers in the state. While implementation details still need to be decided, board members hoped to capitalize on the department’s connection with California employers, infrastructure for processing payroll deductions, and experience with enforcing employer requirements. Similarly, Illinois’ Department of Revenue currently oversees employers’ payroll deposits for taxes, so Illinois stakeholders thought that the Illinois Secure Choice program might be able to leverage its administrative and enforcement experience.

Government officials and stakeholders in New Zealand noted that this approach has worked well for KiwiSaver. Inland Revenue, New Zealand’s tax collection agency, is the interface between employers and providers, which officials said simplifies the administrative role for employers. Employers do not have to engage with various KiwiSaver providers a worker may select nor administer worker requests for opting out. Employers simply send a worker’s contributions to Inland Revenue and the agency sends the worker’s contribution to their KiwiSaver provider.

Allow Small Employers to Choose Whether to Participate and Other Efforts to Recognize Resource Limitations of Small Employers

In recognition of resource limitations for small employers, all of the state efforts would allow small employers of varying sizes to choose whether to participate in the state program. While stakeholders and research indicate that payroll deduction is readily accessible for the majority of employers, some of the smallest employers may not yet have migrated to an electronic payment system. As a result, each of these state efforts allows the smallest employers to choose whether to participate in the program. In particular, states that are considering requiring employers to offer workplace access have exempted the smallest employers from the requirement, but would allow them to choose to offer access to the program. For example, Illinois law exempts employers with fewer than 25 employees and California law exempts employers with fewer than 5 employees. Stakeholders did note a drawback to allowing small employers—as well as self-employed workers—to choose whether to offer the state program. Specifically, if too few employers choose to offer a purely voluntary program, it may not be able to achieve the scale necessary to ensure that costs are reasonable.

In contrast, some of the countries we studied required even small employers to offer workplace access but they took other actions to recognize the resource limitations of small employers, including phasing in the employer requirement and creating specific programs that support small employers. For example, in the U.K. the employer requirement to offer access and automatically enroll workers is being phased in gradually between October 2012 and February 2018 based on employer size, which provides smaller employers additional time to prepare for meeting the new requirements. However, without any other action by the government, U.K officials concluded that small employers may find it difficult to meet the automatic enrollment requirements because of a supply gap—the Pensions Commission concluded that existing providers would find it unprofitable to serve employers that did not previously offer workers access, the overwhelming majority of which had fewer than 15 employees, at a reasonable cost to workers. To address the supply gap, it created the National Employment Savings Trust (NEST) to ensure that all employers, particularly small employers, would have access to a low- cost program, with the added benefit of diminishing the burden on employers of choosing an appropriate provider (see text box 1). Similarly, the Australian government recognized the specific needs of small employers by creating a Small Business Superannuation Clearing House in 2010 to simplify administrative requirements and lessen the administrative burden on small employers. The Clearing House is a free service that allows eligible employers to make one payment at least quarterly on behalf of all of the employer’s workers. The Clearing House then disburses the payments to each of the worker’s choice of fund (see text box 2).

Text Box 1: The United Kingdom’s National Employment Savings Trust (NEST) has a public service obligation to accept any employer (and any qualifying worker) that wishes to use it, and in this way serves all those employers and workers who are unable to find another provider of a retirement savings program. The existence of a low-cost program with a universal public service obligation reduces the burden on small employers who might otherwise expend considerable time and effort in identifying a provider willing to serve them at an acceptable cost. In addition, there are no charges for employers to set up and use NEST. Finally, NEST has worked with the major payroll software providers in the United Kingdom to integrate their platforms with NEST in order to reduce data compliance burdens on employers. NEST representatives thought that this effort could make NEST even easier to use for small employers.

Text Box 2: Australian officials explained that the Small Business Superannuation Clearing House was set up to help employers make contributions on behalf of their workers as required by the Australian Superannuation system. They thought that these contributions could represent a heavy administrative burden for small employers because workers are allowed to choose the provider to which they want the employer to send their contributions, employers must make payments at least quarterly, and superannuation providers all have slightly different forms and payment delivery methods. Created in 2010, the purpose of the Small Business Superannuation Clearing House was to simplify administrative requirements, lessening the administrative burden for small employers— those with 19 or fewer workers or, from July 1, 2015, those with total income of less than $2 million Australian dollars (AUD) (about $1.4 million USD). Employers log onto the Clearing House’s website and are required to complete a one-time registration, after which their involvement is low. As of July 31, 2015, about 120,000 employers are registered to use the service, approximately 15 percent of those eligible. The majority of employers who use the service generally have between 3 and 19 workers. The government has found that these employers typically do not have payroll software. Officials said that employers who use the Clearing House say it saves them time and gives them peace of mind because use of the system guarantees they have met their obligation. The Clearing House is funded through government appropriations and costs the government about $6 million AUD annually.

Other Actions to Reduce Administrative Burden for Employers

States would also take other actions to reduce administrative burden for employers and may be able to learn from other countries’ implementation experiences, especially those of NEST in the U.K., and their own experiences with other state savings programs, including college savings plans and public pension plans (see table 6).

These actions to reduce administrative burden for employers elevate the state’s role in the programs, which could create implementation challenges, including how to fund state actions. Stakeholders generally noted the importance of the state’s acceptance of some of the employer’s administrative duties and liability in encouraging employers to offer workplace access. However, this state role is particularly important for efforts that would require eligible employers to participate, such as in California, Illinois, and Maryland. While enabling legislation provides the intent and the direction of these state programs, the state effort’s governing body will have to make many decisions to develop and implement the programs, including how to educate employers about their responsibilities. In three of the four states we studied that had enacted such legislation—Massachusetts, California, and Illinois—the states have already taken or planned at least 2 years to study options and design their programs. In addition, stakeholders noted that the six states we reviewed would likely incur potentially significant startup and ongoing costs and saw potential challenges in determining how to fund those costs. For example, a California official expects the feasibility study and related legal analysis will cost $1 million, but total startup costs could be much larger. Since the feasibility study has to be funded without a state appropriation, the state official said that an immediate challenge was to raise the necessary funds for the feasibility study so they could better determine cost estimates for developing the program and ongoing administration. The U.K. recently dealt with this issue when it created NEST and received a loan from the government. A NEST representative said it had spent about 300 million British pounds (GBP) (about $459 million USD) over the last 2.5 years to (1) develop systems infrastructure and architecture; (2) enroll employers; and (3) fund the program in the first few years while contributions are very low. For the latter, the NEST representative said that current members are contributing 2 percent of their generally low wage—at these rates contributions could be 20 GBP (about $31 USD) a month—so NEST does not receive revenue from these accounts to pay back the loan and, in fact, runs into a cash flow shortfall. In these early years, NEST is running a slightly higher shortfall than expected because the income levels of members are lower than expected.

Appendix III: Description of Selected National Legislative Efforts to Expand Workplace Retirement Savings Program Coverage Identified by GAO

To provide federal context, we interviewed federal agency officials and knowledgeable industry representatives, and we conducted targeted searches of legislative databases. Then from all bills in the 113th Congress and the 114th Congress categorized in the Legislative Information System as having retirement as a topic, we selected and discuss in the table below those that would make or would have made efforts to expand coverage in workplace retirement savings programs (see table 7). Because this is a select list, however, and we did not include bills that may have had an indirect effect on workplace retirement savings program coverage, this list should not be viewed as exhaustive.

Appendix IV: Description of State Efforts to Expand Workplace Retirement Savings Program Coverage Identified by GAO

We developed the following list of 29 states with recent efforts to expand retirement savings program coverage for private sector workers— including the introduction, action on or enactment of legislation, an executive action, or a study—by (1) reviewing information posted online by industry stakeholders, including the National Council of State Legislatures, the Pension Rights Center, and other industry publications; (2) conducting targeted searches of enacted and proposed state legislation using LexisNexis and WestLaw, in consultation with a law librarian; and (3) interviewing federal officials and knowledgeable industry representatives, including stakeholders at the Pension Rights Center, the American Society of Pension Professionals and Actuaries, and AARP. At multiple points during this process, we confirmed completeness of our list of states with knowledgeable industry stakeholders, including a more in-depth review by a representative of the Center for Retirement Initiatives at Georgetown University, a public policy center created to promote retirement savings solutions at the state level in the United States. (See fig. 11.)

We described the strategies proposed in the state efforts based on documentation we obtained from state legislative or executive office websites. We use “state efforts” to refer to a range of activities that may have occurred in a state, including the introduction of a bill, executive action, studies, or the enactment of legislation. While states are exploring various approaches, a number of state efforts seem to incorporate strategies, such as payroll deduction individual retirement accounts (IRAs) and automatic enrollment, that are similar to those incorporated into “automatic IRA” proposals submitted by the President and some members of Congress. We compiled this list, shown in table 8, by interviewing state officials and knowledgeable industry representatives and conducting targeted searches of legislative databases. We did not conduct an independent, legal analysis to determine whether the features and strategies used by states will hold up under scrutiny and this list may unintentionally exclude relevant state efforts that we did not identify.

Workplace Access and Automatic Enrollment Federally regulated and most provincially regulated employers can voluntarily offer PRPPs to their workers, while Quebec will require employers with five or more eligible workers to offer VRSP. If a federally or provincially regulated employer chooses to offer a PRPP, or is required to offer VRSP, the employer will contract with a licensed provider who will manage the set-up process. Eligible workers will be automatically enrolled. However, workers have 60 days to opt out or may, 12 months after their contributions begin, set their contribution rate to zero for a fixed period of up to five years. Full-time workers are immediately eligible to join a PRPP and part-time workers are eligible after 24 months of continuous service. Eligible workers for Quebec’s VRSP are those who are ages 18 and older, have 1 year of continuous service, and who otherwise do not have the opportunity to contribute to a workplace retirement plan.

Financial Incentives and Worker Contributions PRPPs and VRSPs offer workers tax benefits to encourage participation, but contribution requirements vary. Worker contributions to PRPP receive a corresponding tax deduction up to a set contribution limit. Default contribution rates will be set by the plan administrator for their PRPP, but providers may permit workers to adjust the contribution rate. For VRSP, the default contribution rate is set by regulation at 2 percent until 2017, increasing to 3 percent in 2018 and 4 percent in 2019. However, workers can alternatively set their contribution rate to zero. Employers are not required to make financial contributions to their workers PRPP or VRSP accounts.

Plan Providers Service providers, like banks or insurance companies, must apply for a license to become an administrator of PRPPs or VRSPs, and take on the fiduciary responsibility for administering the plans.

Investment Options Licensed administrators will offer a limited number of investment options including a default option that will be either a balanced fund or a target date fund, and up to five additional investment options with varying degrees of risk.

According to research by a Canadian financial institution, VRSP is estimated to enroll 1 million workers in the province by 2018. Because the PRPP is voluntary for employers and implementation is in the early stages, estimates on participation rates remain unclear.

Fees To ensure fees are reasonable, government regulation requires that PRPP providers charge fees equivalent to or below those charged to members of defined contribution plans with 500 or more members. As of July 2015, VRSP fees for the default option range between 1.09 and 1.25 percent.

At a glance To increase national savings and address the declining trend in private sector retirement plan coverage of the under 65 population—from about 20 percent in 2001 to about 15 percent in 2007—the New Zealand government passed the KiwiSaver Act. The act established KiwiSaver in 2007 as a government- sponsored defined contribution workplace program. KiwiSaver requires employers to automatically enroll all new workers into a qualified plan, with a worker opt- out. Workers are encouraged to participate in KiwiSaver through a series of incentives that include employer contributions, tax benefits, and a one-time government contribution.

Workplace Access and Automatic Enrollment Employers are required to automatically enroll new workers ages 18 to 65 into a KiwiSaver plan. In addition, existing workers, as well as the self- employed and unemployed, can choose to opt into a KiwiSaver plan by notifying their employer or by contacting a provider directly. Employers can select a preferred provider for workers who do not choose their own, but workers have the right to change providers anytime. Following automatic enrollment, workers have between 2 and 8 weeks to opt out.

Financial Incentives and Worker Contributions Participation in KiwiSaver offers eligible workers employer contributions, tax benefits, and a one-time government contribution, to complement workers’ own contributions. For workers who do not opt out, employers are generally required to contribute 3 percent of earnings. In addition, workers who contribute a minimum of $1,043 New Zealand dollars (NZD) (about $663 USD) or more annually get a $521 NZD ($331 USD) tax credit. Until May 21, 2015, the government also made a one-time kick start contribution of $1,000 for new accounts. After this date, new members are no longer eligible for this payment. Workers generally contribute 3, 4, or 8 percent of earnings. After an initial 12 month period, workers have the option of a contributions holiday from 3 months to 5 years.

As of June 2014, KiwiSaver had grown to include 2.35 million members. Of this total, approximately 61 percent chose to opt into KiwiSaver either through their employer or through a plan provider. The remaining 39 percent were automatically enrolled by their employer. Approximately 20 percent of enrolled workers have chosen to opt out of KiwiSaver.

Plan Providers KiwiSaver service providers, such as banks, insurance companies and investment firms, are registered to offer qualifying plans, and deal directly with workers after the initial set-up process. If an employer does not have a preferred KiwiSaver provider and a worker does not select one, Inland Revenue, the government tax collection and social programs agency, allocates workers to one of the nine government-appointed default service providers. All service providers are registered with and monitored by the Financial Markets Authority, the government regulator.

Investment Options KiwiSaver service providers offer a range of products with different investment options and risk levels with the default being a conservatively invested fund. Approximately 25 percent of KiwiSaver participants are in a default investment fund.

Fees Default service providers are licensed by Inland Revenue and establish reasonable fees for participants by submitting a fee schedule as part of the application process. Inland Revenue must also approve any changes to the fee structure. In addition, the Commission for Financial Capability established Fund Finder, an online tool that allows participants to compare plan features and fee structures. Over half of KiwiSaver plans charge between 1 and 1.5 percent in fees—New Zealand uses a Total Expense Ratio tool to measure fees, which is a ratio of total fees to funds under management in percentage terms.

At a glance To address the declining proportion of private sector workers participating in a workplace retirement plan—down from 47 percent in 2002 to about 32 percent in 2012—the United Kingdom government passed legislation in 2008 requiring employers to automatically enroll all eligible workers into a retirement plan. Employers can meet their obligation by enrolling workers in a plan that meets minimum standards or the new National Employment Savings Trust (NEST) set up by the government.

Workplace Access and Automatic Enrollment Employers are required to automatically enroll workers to a qualified workplace retirement plan if they are between age 22 and State Pension Age—which is variable based on age, gender, years of employment, and national insurance status—and have earnings over 10,000 British pounds (GBP) (about $15,353 USD) for the 2015/2016 tax year. The U.K. government reviews the threshold annually and may adjust it. Once they have been automatically enrolled, workers have 1 month to opt out. Some workers earning less than 10,000 GBP, ages 16 to 21, and over the State Pension Age have the option to opt in. Every 3 years, employers are required to automatically re-enroll workers who have previously opted out.

Automatic enrollment is being phased in over the course of several years beginning with the largest employers. Since its implementation began, the rollout had reached over 50,000 employers and 5.3 million workers by end of June 2015. An additional 1.2 million employers are scheduled to implement automatic enrollment for approximately 4 million employees by April 2017. The rollout is scheduled to be completed by 2018, when it will cover employers of all sizes. Worker opt-out rates were approximately 9 to 10 percent in 2013 and 12 percent in 2014, below the initial government estimates of 33 percent.

Financial Incentives and Worker Contributions For workers who do not opt out, the total minimum contribution from the employer, government, and worker will combine to reach 8 percent by 2018. Employers are required to contribute 1 percent of qualified earnings—a band of earnings between 5,824 GBP and 42,385 GBP (about $8,941 USD and $65,073 USD) as of 2015—gradually increasing to 3 percent by 2018. In addition, the U.K. government will contribute the equivalent of 1 percent of qualified earnings in the form of tax relief by that date. Workers currently pay 0.8 percent of qualified earnings, gradually increasing to 4 percent by 2018, through payroll deduction.

Plan Providers Employers may offer a plan through a commercial provider, such as an insurance company, if it meets or exceeds certain legal criteria. If an employer does not offer a qualifying plan, they must enroll workers into NEST, which was established to act as a low-cost default provider. It has a public service obligation to accept any employer that wants to use it, including smaller employers that may not be able to find suitable commercial providers.

Investment Options NEST offers a limited number of investment options to reduce complexity and fees. The default fund is a diversified target date fund, which is conservatively invested to avoid capital loss during initial years of saving to discourage workers from opting out. In addition to the default, NEST offers five other options with varying levels of risk.

Fees NEST does not charge employers to use the program. Workers enrolled in NEST pay an annual management fee of 0.3 percent. A temporary additional fee of 1.8 percent on contributions is also deducted until NEST start-up costs are recovered. According to NEST officials, this is equivalent to a total fee of about 0.5 percent annually, which is comparable to fees charged by larger workplace retirement programs. From April 2015 onward, workers who enroll with non-NEST commercial providers pay an annual charge fee capped at 0.75 percent.

Appendix VI: Technical Appendix for Data Analysis

Factors Affecting Workplace Retirement Program Participation

In this appendix we summarize the results of our analyses of factors affecting retirement program participation. We first looked at the likelihood of participating in retirement programs overall, or among all workers. We then examined, among all workers, the likelihood of their employers offering them retirement programs. Then, among workers whose employers offered programs, we looked at the likelihoods of workers being eligible for them. And finally, we looked at the likelihood of participating in retirement programs among workers who were offered programs and eligible for them. In all of these analyses, we estimated how these different likelihoods were associated with different characteristics of the workers, including their income, occupation, education, age, gender, marital status, race/ethnicity, the size of the firm they worked for, whether they worked full-time or part-time, whether they worked for the full year or only part of the year, and whether they were or were not union members.

For our analyses, we used publicly available data from the Survey of Income and Program Participation (SIPP) from 2012, as shown in tables 9 – 12 of this appendix. To correct for under-reporting of participation we also used W-2 data as described in appendix I. Results from the public use data and W-2 data were very similar in the size and significance of variables included in our analysis, as shown in table 13 at the end of this appendix. In all of the tables, the numbers and estimates derived from them use weighted data to reflect population estimates, using weights provided by SIPP.

Likelihood of Participating

Table 9 shows how various categories of workers differ in their likelihood (expressed both as percentages and odds) of participating in retirement programs. In the first column of numbers in the table we show the number of workers in each group (or category) defined by the different factors. The next two columns of numbers reflect the percentages in each group that were and were not participating in retirement programs. The traditional way of comparing groups involves considering the difference in those percentages, and those differences are in many cases quite sizable. For example, only 14 percent of the workers in the lowest income quartile were participating in retirement programs, while 76 percent of the workers in the highest income quartile were participating in retirement programs. Only 18 percent of workers with less than a high school diploma, but 62 percent of workers with at least a bachelor’s degree, were participating in retirement programs. And while only 23 percent of the workers in firms with fewer than 50 workers were participating in retirement programs, 60 percent of workers in firms with more than 1,000 workers were retirement program participants. Sizable differences also exist between most of the categories of workers defined by the other characteristics shown in the table.

An alternative method of estimating the likelihood of participating in retirement programs and the differences in those likelihoods between groups involves calculating odds and odds ratios. The odds on participating (vs. not participating) in retirement programs are calculated by taking, overall or for any one group, the number (or percent) of workers participating in retirement programs and dividing it by the number (or percent) of workers not participating in retirement programs. Overall, using the percentages in the final row of table 9, the odds on participating in retirement programs in our (weighted) sample of workers is 45.4 ÷ 54.6 = .832, apart from rounding. While somewhat different and less traditional than percentages, the odds have a fairly direct and simple interpretation: In this case it implies that overall there are .83 retirement program participants for every 1 non-participant, or 83 participants for every 100 non-participants. In the fourth column of numbers in table 9, we show the odds on participating for each subgroup defined by the different worker characteristics shown in the table. There we see, for example, that the odds on participating in retirement programs increases from 0.167 for workers in the lowest income quartile to 0.514 for workers in the second income quartile to 1.338 for workers in the third income quartile and, finally, to 3.176 for workers in the highest income quartile.

The unadjusted odds ratios in the penultimate column of table 9 show how the odds on participating in retirement programs vary across the different subgroups. Where the factors or worker characteristics distinguish only two groups, like union membership, we simply take the ratio of the odds for one group to the other – e.g., 2.103 ÷ 0.774 = 2.72, which implies that the odds on union members participating in retirement programs are 2.7 times higher than the odds for workers who are not union members. Where the factors involve more than two subgroups, we choose one subgroup as the referent category and calculated the ratios of the odds for the other subgroups relative to that one. To make comparisons across income categories, for example, the lowest income quartile was chosen as the referent category, and the ratios shown for the other subgroups (i.e., 0.514 ÷ 0.167 = 3.08; 1.338 ÷ 0.167 = 8.01; and 3.176 ÷ 0.167 = 19.01) indicate that workers in the second, third, and highest income quartiles have higher odds on participating than workers in the lowest quartile, by factors of 3, 8, and 19, respectively. The full set of unadjusted odds ratios shown in the table indicate that virtually all of the subgroups differ from one another, in most cases significantly, and in many cases by a substantively large amount. Workers in the broad category of occupations involving Management, Business, Science, and Arts, for example, were 6.5 times as likely to be participating in retirement plans (or have odds that are 6.5 times higher) as workers working in Service occupations. Workers with bachelor’s degrees were 2.7 times as likely as workers with less than a high school education to be participating in retirement programs. And, to offer a final example, Hispanics were less likely than white non-Hispanics to be participating in a retirement program by a factor of 0.37.

These unadjusted odds ratios may seem to inflate the differences between groups, especially to those who are accustomed to comparing percentages. That is, while the odds ratio comparing workers in the highest and lowest income quartiles suggests a 19-fold difference between the two groups, there is only slightly more than a 5-fold difference between the two groups in the percentage participating (i.e., 76.1 ÷ 14.3 = 5.3). Focusing on the difference between groups in the percent participating, however, ignores the implicit difference in the percent not participating between groups, which differed by a factor of 23.9 ÷ 85.7 = 0.28. One advantage of the odds ratio (also referred to as the cross-product ratio) is that in estimating the ratios of participants to non-participants it makes fuller use of the data involved in the comparisons, and considers both differences at once. In fact, the odds ratio we obtain in this case, equal to 19.01, could just as easily have been obtained by taking the ratio of these two percentage differences (i.e., 5.3 ÷ 0.28 = 19.01, apart from rounding).

Regression Results

Another advantage of odds ratios is that, unlike percentage differences, they can be adjusted using multivariate models (logistic regression models) so that they reflect the net effect of each variable, rather than the gross (or unadjusted) effect. The odds ratios in the final column of table 9 show how different the odds on participating are when we consider all of the variables in the table simultaneously. Because of the correlations among some of the variables in the table (like income and education), the effects of the different variables, or the differences between the categories of workers they define, are in many cases substantially attenuated (or smaller) when we look at them simultaneously than when we look at each individually. The odds ratio estimating the income difference just discussed, for example, is reduced when we estimate its effect net of the other variables, from 19.0 to 6.8. Even after adjusting the ratios to take account of the interrelatedness of many of the factors in the table, most of the subgroups compared remain significantly different from one another, and in many cases the differences are sizable. In addition to the income difference mentioned above we find, even after adjustment, that the likelihood of participating varies significantly for many of the variables we examined (see table 9). For example: 1. Workers in all other occupational categories have significantly higher odds on participating in retirement programs than workers in Service occupations, and the odds are nearly twice as high (OR = 1.95) for workers in Management, Business, Science, and Arts occupations as for those in Service occupations. 2. Workers with less than a high school diploma were less likely (by a factor of 0.6) than those with less than a high school education to be participating, though after adjustment those with some college or with a Bachelor’s degree are not statistically distinguishable from those with a high school diploma. 3. Workers in larger firms had higher odds on participating in retirement programs than workers in smaller firms. Workers in firms with 51 to 100 workers were about twice as likely (OR = 2.1) as workers in firms with 50 or fewer workers to participate, and workers in firms with more than 1,000 workers were about five times (OR = 4.9) as likely. 4. The youngest category of workers (ages 18-24) were only roughly one-third as likely (OR =0.37) as workers 25-34 to be participating in retirement programs; workers 35-44 were not significantly different from workers 25-34; and workers 45-54 and 55-64 were both more likely than those 25-34 to be participating in retirement programs, in both cases by a factor of 1.4. Workers 65 and over had lower odds on participating than all groups except the very youngest, and odds that were lower than workers 25-34 by a factor of 0.68. 5. Additionally, full-time workers were 1.6 times more likely than part- time workers to be participating in retirement programs; full-year workers were 2.5 times more likely than part-year workers to be participating in retirement programs; and union workers were twice as likely (OR = 2.0) as non-union workers to be participating in retirement plans. 6. Finally, male workers were less likely than female workers to be participating in retirement programs, by a factor of 0.91; currently married workers were 1.2 times more likely than never married workers to be participating in retirement programs, while widowed, divorced, and separated workers were not significantly different from those who were never married; and Black, Hispanic, and Asian workers had lower odds on participating than White, non-Hispanic workers, by factors of 0.8, 0.6, and 0.7, respectively.

Some of these differences in the likelihood of participating in retirement programs are likely due to the fact that some categories of workers are more likely than others to work for employers that offer retirement programs. Table 10 shows that a great many categories of workers differ in terms of whether their employer offers a program. As in the table above, the unadjusted odds ratios indicating the differences between groups in the odds on their employers offering a program (in the penultimate column of the table) tend to be somewhat larger than the adjusted odds ratios, or the odds ratios obtained from multivariate models in which all of the different factors are considered simultaneously using a multivariate model (in the final column). But even the adjusted odds ratios reveal some sizable and significant differences, including the following: 1. Workers with higher incomes are more likely to work for employers that offer retirement programs. Workers in the 2nd, 3rd, and highest income quartiles have higher odds on working for employers that offer retirement programs than workers in the lowest income quartile, by factors of 1.7, 2.7, and 3.9, respectively. 2. Workers in all occupational categories except for Natural Resources, Construction, and Maintenance Occupations have significantly higher odds on working for employers that offer retirement programs than workers in Service occupations, and the odds are nearly twice as high (OR = 2.0) for workers in Management, Business, Science, and Arts occupations as for those in Service occupations. 3. Workers with less than a high school education were less likely to work for employers that offer retirement programs than those with a high school diploma, by a factor of 0.73, while workers with some college or a Bachelor’s degree were more likely (in both cases) by a factor of roughly 1.2. 4. Workers in larger firms had substantially higher odds on working for employers that offer retirement programs than workers in smaller firms. Workers in firms with 51 to 100 workers were about three times as likely (OR = 2.95) as workers in firms with 50 or fewer workers to work for employers that offer retirement programs, workers in firms with 101 to 500 workers and with 501 to 1,000 workers were 5 and 6 times as likely, respectively, and workers in firms with more than 1,000 workers were about 9 times (OR = 9.1) as likely to work for employers that offer retirement programs. 5. The youngest category of workers (ages18-24) were only roughly three-fourths as likely (OR =0.76) as workers 25-34 to be working for employers that offer retirement programs; workers 35-44 were also somewhat less likely than workers 25-34 to work for employers that offer retirement programs (OR = 0.88); and workers 45-54 and 55-64 did not significantly differ from those 25-34 in working for employers that offer retirement programs. Workers 65 and over had lower odds on working for employers that offer retirement programs than all groups, and odds that were lower than workers 18-24 by a factor of 0.62. 6. Additionally, full-time workers were 1.2 times more likely than part- time workers to be working for employers that offer retirement programs; full-year workers were 1.5 times more likely than part-year workers to be working for employers that offer retirement programs, and union workers were twice as likely (OR = 2.0) as non-union workers to be working for employers that offer retirement programs. 7. Finally, male workers and female workers did not significantly differ in their chance of working for employers that offer retirement programs (OR = 0.96); currently married workers were slightly but significantly (OR = 1.1) more likely than never married workers to be working for employers that offer retirement programs, while widowed, divorced, and separated workers were not significantly different from those who were never married; and Black, Hispanic, and Asian workers had lower odds on working for employers that offer retirement programs than White, non-Hispanic workers, by factors of 0.8, 0.6, and 0.6, respectively.

Some of these differences in the likelihood of participating in retirement programs are also likely due to the fact that some categories of workers are more likely than others to be eligible for the retirement programs that their employers offer. Table 11 shows that a number of categories of workers differ in terms of whether they are eligible for the retirement programs their employers offer, though fewer factors are significantly associated with eligibility than participation. The differences that do exist, like those described above, are in virtually all cases somewhat smaller when we estimate them simultaneously than when we estimate them separately; nonetheless, the odds ratios from the multivariate models indicate that: 1. Workers with higher incomes are more likely to be eligible for the retirement programs their employers offer than workers with lower incomes. Workers in the 2nd, 3rd, and highest income quartiles have higher odds on being eligible than workers in the lowest quartile, by factors of 2.0, 4.4, and 7.5, respectively. 2. Occupation was not significantly associated with whether workers were eligible for the retirement programs their employers offer. Education was significantly related to eligibility, however; workers with some college and with a college degree were less likely than those with a high school degree to be eligible, by factors of 0.8 and 0.7, respectively. 3. Workers in mid-size firms were not significantly different from workers in the smallest firms in their chance of being eligible for the retirement programs their employers offer, though workers in firms with more than 1,000 workers were 1.3 times as likely to be eligible as workers in firms with 50 or fewer workers. 4. The youngest category of workers (ages 18-24) were less than one- half as likely (OR = 0.44) as workers 25-34 to be eligible for retirement programs their employers offer, while workers 35-44, 45-54, and 55- 64 were more likely to be eligible than those 25-34, by factors of 1.4, 1.6, and 1.6, respectively. Workers 65 and over were less likely to be eligible than workers 18-24, by a factor of 0.73. 5. Full-time workers were 2.6 times more likely than part-time workers to be eligible for the retirement programs their employers offer; full-year workers were 3.1 times more likely than part-year workers to be eligible for the retirement programs their employers offer; and union workers were 1.4 as likely as non-union workers to be eligible for the retirement programs their employers offer. 6. Finally, male workers and female workers did not significantly differ in their chance of being eligible for the retirement programs their employers offer (OR = 1.1); currently married workers were significantly more likely (OR = 1.4) than never married workers to be eligible for the retirement programs their employers offer, while widowed, divorced, and separated workers were not significantly different from those who were never married; and race and ethnicity was not significantly associated with eligibility.

Given these results indicating that participation in retirement programs is partly the result of whether programs are offered, and whether workers are eligible for them, in table 12 we show how various categories of workers differ in their likelihood of participating in retirement programs when we restrict our attention to workers whose employers offer programs for which they are eligible. While differences are in most cases smaller than they appeared when we looked at all workers, regardless of whether they worked for companies that offered retirement programs and whether they were eligible for them, many still remain sizable and statistically significant. Focusing again on the multivariate odds ratios in the final column of the table, the results are as follows among those who were eligible for the programs their employers offered: 1. Workers with higher incomes are more likely to participate than workers with lower incomes. Workers in the 2nd, 3rd, and highest income quartiles have higher odds on participating in retirement programs than workers in the lowest income quartile, by factors of 1.2, 2.2, and 4.4, respectively. 2. Workers in all occupational categories except for Production, Transportation, and Material Moving Occupations have significantly higher odds on participating in retirement programs than workers in Service occupations, by factors ranging from 1.3 to 1.5. 3. Workers with less than a high school diploma were less likely (by a factor of 0.7) than those with a high school education to be participating, though after adjustment those with some college or with a Bachelor’s degree are not significantly different from those with a high school diploma. 4. Workers in firms with 51 to 100 workers were somewhat less likely (OR = 0.75) as workers in firms with 50 or fewer workers to participate, while workers in each of the larger firm categories (with more than 100 workers) were not significantly different from the smallest firms. 5. The youngest category of workers (ages 18-24) were only roughly one-half as likely (OR =0.46) as workers 25-34 to be participating in retirement programs; workers 35-44, 45-54, and 55-64 were more likely than those 25-34 to be participating in retirement programs, by factors of 1.3, 1.7, and 1.9, respectively. Workers 65 and over had odds of participating that were not statistically distinguishable from the odds for workers 25-34 (OR = 0.9). 6. Full-time workers were slightly more likely (OR =1.1) than part-time workers to be participating in retirement programs; full-year workers were 1.3 times more likely than part-year workers to be participating in retirement programs, though the result was not statistically significant; and union workers were 1.7 times as likely as non-union workers to be participating in retirement programs. 7. Finally, male workers were less likely than female workers to be participating in retirement programs, by a factor of 0.8; marital status was not statistically associated with participation; and Black and Hispanic workers had lower odds on participating than White, non- Hispanic workers, by factors of roughly 0.7 in both cases. Asians and other non-Hispanics were not significantly different from Whites.

Ignoring for the moment the numbers in parentheses, table 13 summarizes how the differences in participating across groups change when we look at the different group characteristics (1) one at a time among all workers, (2) all at once among all workers, and (3) all at once among workers who are eligible for the retirement programs offered by their employers. Some of the differences that appear sizable and significant when we look at them in isolation (column 1) diminish in size and become insignificant when all of the different factors are considered simultaneously (column 2). This is true of the differences between 1) workers with more than a high school education vs. workers with only a high school diploma, 2) workers ages 35-44 vs. workers ages 25-34, 3) workers who are widowed, divorced, or separated vs. workers who were never married, and 4) other non-Hispanic workers and white non-Hispanic workers. Further, some of the differences that remain sizable and significant even when they are considered simultaneously (column 2) diminish and become insignificant when we restrict the sample to workers who were offered programs and were eligible for them (column 3). Such is the case with the differences between 1) workers in Production, Transportation, and Material Moving Occupations vs. workers in Service Occupations, 2) workers in each of the larger firm categories with more than 100 workers vs. those in firms with 50 or fewer workers, 3) workers 65 and older vs. workers 25-34, 4) full-year vs. part-year workers, 5) married vs. never married workers, and 6) Asian non-Hispanic vs. white non-Hispanic workers. Most of the differences that remain significant after taking account of eligibility, which are noted in the bullets above associated with table 12, are smaller than they appeared before taking account of eligibility, though some of the age differences are exceptions to this. The factors that have the most pronounced effects when they are considered jointly and restricted to eligible workers are income, occupation, age, and union membership.

The numbers in parentheses in the table show these same coefficients from the same bivariate and multivariate models for the same subgroups that we obtain when we use the “corrected” data which combines W-2 information from the Census with the self-reported data from SIPP. In virtually all cases the coefficients are very similar, and only in a few instances, involving the adjusted education effect for all workers, and the adjusted differences between part-time and full-time workers and workers in firms with 1,000+ workers and in firms with fewer than 50 workers among those who are eligible, are the estimated odds ratios significant in one set of results but not in the other. In virtually all other instances, the effects are similar in both size and significance.

Table 9. Percentages of Workers of Different Types Participating and Not Participating in Retirement Programs, and Odds and Odds Ratios Derived from Them

Odds Ratio (Multivariate)

Appendix VI: Technical Appendix for Data Analysis

Odds Ratio (Multivariate)

Table 10. Percentages of Workers of Different Types Whose Employers Do and Do Not Offer Retirement Programs, and Odds and Odds Ratios Derived from Them

Odds Ratio (Multivariate)

Appendix VI: Technical Appendix for Data Analysis

Odds Ratio (Multivariate)

Table 11. Percentages of Workers of Different Types Who Are Eligible and Ineligible for the Retirement Programs Their Employers Offer, and Odds and Odds Ratios Derived from Them

Odds Ratio (Multivariate)

Odds Ratio (Multivariate)

Variable Income

(1) Unadjusted Odds Ratios (All Workers) (2) Adjusted Odds Ratios (All Workers) (3) Adjusted Odds Ratios ( Eligible Workers)

3.08 (2.82)

2.00 (1.94)

1.22 (1.30)

8.01 (7.07)

4.04 (3.79)

2.23 (2.44)

19.01 (18.05)

6.84 (6.84)

4.43 (5.42)

1. Management, Business, Science, and Arts Occupations 6.48 (6.46)

1.95 (1.95)

1.53 (1.56)

3. Sales and Office Occupations 2.78 (2.92)

1.54 (1.71)

1.34 (1.45)

4. Natural Resources, Construction, and Maintenance Occupations 2.23 (1.98)

1.25 (1.18)

1.37 (1.47)

5. Production, Transportation, and Material Moving Occupations 2.74 (2.68)

1.44 (1.50)

1.17 (1.22)

0.37 (0.40)

0.61 (0.66)

0.74 (0.68)

1.31 (1.39)

1.03 (1.14)

0.97 (0.97)

2.74 (2.95)

1.06 (1.18)

1.18 (1.18)

1. More Than 1,000 Workers 4.85 (4.77)

4.93 (4.89)

1.17 (1.29)

2. 501 to 1,000 Workers 3.87 (4.03)

3.57 (3.82)

0.92 (1.05)

3.57 (3.57)

3.01 (3.10)

0.86 (0.90)

2.37 (2.32)

2.07 (2.07)

0.75 (0.71)

Variable

(1) Unadjusted Odds Ratios (All Workers) (2) Adjusted Odds Ratios (All Workers) (3) Adjusted Odds Ratios ( Eligible Workers)

0.18 (0.24)

0.37 (0.50)

0.46 (0.43)

1.32 (1.28)

1.08 (1.06)

1.26 (1.20)

1.69 (1.65)

1.43 (1.41)

1.67 (1.63)

1.78 (1.68)

1.44 (1.34)

1.87 (1.75)

0.77 (0.73)

0.68 (0.63)

0.90 (0.76)

3.26 (3.34)

1.62 (1.76)

1.14 (1.14)

4.46 (3.69)

2.47 (1.93)

1.27 (1.28)

2.72 (2.55)

2.00 (1.75)

1.73 (1.60)

1.17 (1.15)

0.91 (0.92)

0.84 (0.79)

2.62 (2.48)

1.19 (1.21)

1.08 (1.11)

1.69 (1.59)

0.97 (0.97)

0.86 (1.06)

2.32 (2.17)

0.99 (0.96)

0.86 (0.85)

1.33 (1.35)

0.92 (1.01)

0.73 (0.78)

Variable

(1) Unadjusted Odds Ratios (All Workers) (2) Adjusted Odds Ratios (All Workers) (3) Adjusted Odds Ratios ( Eligible Workers)

0.66 (0.72)

0.75 (0.83)

0.74 (0.75)

0.37 (0.37)

0.58 (0.58)

0.67 (0.71)

0.90 (0.89)

0.66 (0.64)

0.97 (0.91)

0.73 (0.77)

0.86 (0.91)

0.91 (0.85)

Appendix VII: Comments from the U.S. Department of Labor

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Kimberly Granger (Assistant Director), Sharon Hermes and Jessica Gray (Analysts-in-Charge), Melinda Bowman, Gustavo Fernandez, Grant Mallie, Douglas Sloane, Walter Vance, and Seyda Wentworth made key contributions to this report. Also contributing to this report were David Chrisinger, Peter Del Toro, Cynae Derose, Helen Desaulniers, Jennifer Gregory, Stephen Komadina, Kathy Leslie, Andrea Levine, Ashley McCall, Sheila McCoy, Ty Mitchell, Matthew Nattinger, Drew Nelson, Mimi Nguyen, Susan Offutt, Mark Ramage, Margie Shields, Joseph Silvestri, Jeff Tessin, Kimberly Walton, Margaret Weber, Craig Winslow, and Paul Wright.

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