An effort is once again brewing in Michigan to try come up with a new way to boost retirement savings among those who work at restaurants, construction firms, small factories, Mom & Pop stores and elsewhere that don’t offer 401(k) plans.
Make no mistake, we’ve been here before. In early 2006, then-Gov. Jennifer Granholm floated a state-run 401(k) savings plan aimed at small businesses that didn’t offer such plans. Again in 2016, we heard more talk of offering a turnkey type of plan in Michigan that would enable small employers to get over the cost constraints associated with offering their own plans.
Now, though, these kinds of efforts are gaining ground in other states.
The OregonSaves program was the country’s first state-based program when it rolled out an initial pilot phase in July 2017. Since then, Oregonians have saved $200 million into that program, according to the state. Six years later, nearly 118,000 workers from more than 21,000 businesses are saving money toward retirement out of each paycheck in their own Individual Retirement Account.
Oregon also is the first state to welcome cannabis businesses and their employees into the program.
Small business owners who aren’t offering retirement savings plans say 401(k)s are too costly, too complicated, and too time consuming to operate. The state-based plans are designed to fill that gap.
AARP Michigan part of ‘listening sessions’
Paula Cunningham, state director of AARP Michigan, told the Free Press in a phone interview Tuesday that conversations are being conducted about how Michigan can start a new privately managed, plug-and-play retirement savings option for small businesses. AARP calls the strategy a “work-and-save” plan.
No legislation has been introduced in Michigan at this point but backers expect action sometime in the fall.
Cunningham said AARP is working with Michigan Treasurer Rachel Eubanks and Michigan Lt. Gov. Garlin Gilchrist, going across the state to conduct what she calls “listening sessions” to gather information that would help draft proposed legislation that could get passed. The topic has been discussed, she said, with the Michigan Chamber of Commerce, which has its own multiemployer 401(k) plan, and the Small Business Association of Michigan, as well.
More:Rolling back Michigan’s retirement tax triggers plenty of questions, confusion
On Thursday, the AARP released results of a survey conducted among 548 small business owners in Michigan who overall agree that there’s some need for more retirement options.
In the AARP-commissioned survey, six in 10 voiced concern about their employees not having enough money to cover health care or living expenses in retirement. A bit more than half said a lot more needs to be done to encourage Michigan residents to build up a retirement nest egg.
When those surveyed in Michigan were asked how likely they would be to offer their employees access to a proposed state retirement savings option described in the survey, more than two-thirds said they would likely offer it.
Cunningham said there’s a need among smaller employers — especially those with 200 or fewer employees — for a type of work-and-save program that would be administered by a third-party, not the state, to maintain a competitive advantage to attract and retain workers.
Increasingly, she said, people fear outliving their money as many live into their 80s and 90s.
Derek Nietling, owner of Granny’s Kitchen on Main Street in Oakley in Saginaw County, said employees brought up the idea of adding a 401(k) or retirement plan when he’s asked how to improve benefits there. But Nietling, who bought the restaurant from his grandparents in February, isn’t sure it’s an option that he can afford as a small business owner.
The restaurant — which specializes in barbeque, fish fries on Fridays and breakfast — has 15 employees. Some employees are 18 years old; others are in their mid-30s. Kitchen employees make around $14 to $15 an hour; serving staff make about $4 to $5 an hour, plus tips.
Why do we need yet another retirement plan?
Working a few years at a small company that doesn’t offer a retirement savings plan can cost you in the long run — especially if you don’t take time to save on your own in a traditional IRA or Roth IRA.
Many times, Cunningham said, some wonder why any other type of savings plan is needed. Cunningham said she is sometimes asked: “Why not just have people go out there and do it on their own?”
“But the reason is because they don’t. It’s as much of a behavioral change as it is anything else,” she said. “They don’t know where to go. They don’t know how to get started.”
Cunningham, who previously served as CEO of Capitol National Bank in Lansing from 2006 through 2015, remembers meeting many young people who hadn’t even been inside of a bank.
According to AARP’s research, about 42% of Michigan’s private sector employees — or roughly 1.56 million people — work for an employer that does not offer either a traditional pension or a retirement savings plan. This figure is a broad one that includes part-time and contingent workers. AARP has been promoting the state-supported retirement savings options in several states.
Auto-IRA momentum is building in 2023
John Scott, who directs the retirement savings project at the Pew Charitable Trusts, said 15 states have passed legislation to create a statewide automated retirement savings program, which some refer to as auto-IRAs.
“At heart, this is a very basic payroll deduction IRA,” Scott said.
The employer pays nothing to administer the plan. No employer contributions are allowed.
Instead, the employer provides information to the state for the payroll deduction process for each employee. A set amount of money is automatically taken out of the worker’s paycheck and put into the plan for the worker.
The money in the account continues to belong to the employee even if he or she takes a job somewhere else. Depending on how the state sets up the plan, it’s possible that some money, such as up to $1,000 or so, could be withdrawn for emergencies or special situations.
Down the line, if the employee wants to save money outside of this plan, say including through a Roth IRA, that continues to be an option.
A state board chooses the investment manager for these plans and the state treasurer often plays a key role with some limited administrative support. Many times, fees associated with the assets in these plans often cover the costs.
Often, Pew’s Scott said, the programs are set up where workers automatically save 5% of their pay. But the employee can adjust that savings or even opt out. Many times, workers are saving around $100 to $170 a month, based on data from the Georgetown University Center for Retirement Initiatives.
“We bank on the fact that once you’re in, you’ll keep saving. You won’t opt out,” Scott said.
So far, Scott said, 15 states adopted automated savings programs where the worker is automatically enrolled if their employer does not provide retirement benefits. The automated savings states are California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Vermont and Virginia. Only seven of these plans so far are up and running with active savers.
Massachusetts offers a multiple employer plan that employers can voluntarily adopt for their workers, but there is no requirement to do so. Scott said Massachusetts is looking at an auto-enroll IRA now, too, as is Pennsylvania.
Nearly two dozen states are reviewing or proposing new retirement options for helping workers who aren’t covered by retirement plans at their jobs, according to the OregonSave program’s research.
Often, the programs benefit younger workers, including people of color, who might not save otherwise and face a retirement savings gap. About 64% of Hispanic workers, 53% of Black workers and 45% of Asian American workers do not have access to an employer-provided retirement plan, according to the AARP.
Nearly half of workers ages 18 to 64 in the private sector work for businesses that do not offer any type of retirement plan, according to AARP research.
States that don’t create opportunities to save, experts say, ultimately will need to pick up other costs as seniors live in poverty.
Insufficient retirement savings could drive many to need social assistance. Pew estimates that cumulatively over a 20 year period through 2040, the state of Michigan’s cost from insufficient retirement savings — chiefly Medicaid costs — will be $11.2 billion. Because Michiganders are also federal taxpayers, Scott said, the federal cost to Michigan from insufficient retirement savings will total $37.3 billion cumulatively over 20 years.
Some retirement options exist
Some small businesses are able to tap into a multiemployer, Michigan Chamber plan created in 2019. The chamber is partnering with Michigan-founded and based Tri-Star Trust and the Newport Group to offer the retirement tool to businesses so the employer doesn’t have to take on all the costs of a standalone plan.
Dozens of employers participate, like other chambers of commerce, associations, nonprofits, small employers in technology, manufacturing, professional services, and real estate firms, according to Sara Wurfel, a spokesperson for the state chamber.
“With wage compression, inflation and a tight labor force, a 401(k) is an important benefit, but also a significant decision when looking at overall costs,” Wurfel said.
The Michigan Chamber, she said, would be in favor of a state solution that helps businesses offer and afford a retirement benefit for employees, she said, but would warn against any strict mandates for all employers that could “create unintended consequences and signal undo, intrusive government regulation in the workplace.”
Some change is already on the horizon, too, and critics of state-driven plans in other states say a new federal law — known as Secure 2.0 — could fix many issues. Beginning in 2025, the federal law will require companies with new 401(k) plans and 403(b) plans to automatically enroll eligible employees at a minimum contribution rate of 3%, but no more than 10%. The employee may opt out.
To be sure, employers won’t be required to offer 401(k) plans under Secure 2.0.
Secure 2.0 — which was signed into law in late 2022 — expands tax credits for companies that could help encourage the companies to start their own plan for workers. The law also allows for a new type of retirement plan, called the Starter K, that is a simplified version of the 401(k). Such changes can bring savings plans to an extra 19 million additional workers, according to estimates.
Supporters of state plans, though, note that Secure 2.0 won’t solve all problems and they maintain that more will need to be done to address the fact that so many people across the country work for small employers who do not provide a pension or automatic savings plan.
“As some employers cannot offer a retirement plan, state savings programs will be needed,” Scott said.
What’s certain: Collecting just a Social Security check at retirement won’t be enough. Millions of people nationwide still need some way to automatically save on their own for retirement.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on Twitter @tompor.