Not Saving Enough at Work? How About a Boost From Your State?

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Don't have a 401(k) or other retirement plan through your employer? Maybe your state government will have something to offer.

Officials in a number of states are considering the idea of setting up retirement savings plans for private-sector workers who do not have one, using the state's expertise and bargaining power. Plans under consideration range from helping small employers set up IRAs for their workers to supporting state-sponsored 401(k) plans.

None has actually reached the operating stage so far, but the idea is attracting a wide range of backers. "It looks like we might have something up and running by 2010, earlier if we're lucky," said Clare Hushbeck, a labor economist who works with states on economic issues for AARP.

The importance of drawing all workers into the retirement savings system is also attracting strong interest in Congress. In late June, a House Ways and Means subcommittee heard testimony on ways the government might encourage the use of IRAs, including possibly requiring employers that do not offer any other retirement plan to enroll their workers in IRAs funded through payroll deductions. Workers could opt out of such "auto-IRAs," but backers hope that most would see their value and press their employers for more traditional plans such as 401(k)s.

That goal is shared by states looking at a variety of options to help people save. In Washington state, for instance, the Department of Retirement Systems has been directed by the legislature to design a plan that could be made available to all workers in the state. Department Director Sandy Matheson said they are studying a variety of IRA-based plans that might appeal to companies and workers who are not ready for a 401(k). The state might operate the plans or contract them out under rules that the state would prescribe. "We want solutions that everybody thinks are a good idea," she said.

Other states where similar proposals are drawing interest include Connecticut, California, Maryland, Virginia, West Virginia, Tennessee and Indiana.

Today, more than half of American workers have no pension or other retirement plan through their jobs. Many of these are employees of small businesses that find standard plans, such as 401(k)s, too expensive to set up for a small number of workers. Supporters of state-assisted plans see those as a way of bringing 401(k) or IRA-based retirement coverage to more of these employees.

Under current law, a variety of retirement savings plans are available to workers. These include individual retirement accounts that workers fund themselves, choosing investments they want to make. What they put in may be tax-deductible; employees would pay taxes only when they start taking the money out.

More complicated plans are also available but must be sponsored by an employer. The most common is the well-known 401(k), under which employees can set aside a percentage of their pay to be invested in a variety of options, such as mutual funds chosen by the employer. Under federal law, contributions to a 401(k) can be much larger than to an IRA. Also, with a 401(k) plan, employers are allowed to match the employee contribution up to a certain limit.

The money workers put into a 401(k) is "pre-tax," meaning that it comes out of their pay before taxes are computed. Earnings are not taxed until withdrawn. The many rules surrounding the establishing of 401(k)s often discourage small employers from setting them up. Consequently, states may be looking at combining payroll deductions with the simpler IRAs if they decide to act.

"The idea is to stimulate coverage where the market is not working well," said J. Mark Iwry, a nonresident senior fellow at the Brookings Institution in Washington, who is a strong proponent of state-assisted retirement plans. "If the employer is unwilling to offer its employees a plan, the state could stimulate the market to fill the coverage gap" by encouraging IRAs funded through payroll deductions.

Connecticut came close to bringing the idea to practical reality this spring when the Senate approved a bill allowing the state to sponsor a 401(k) plan for businesses with fewer than 100 workers. However, the measure, backed by State Comptroller Nancy Wyman, D, and State Senate President Donald E. Williams Jr., D, died when the House adjourned without bringing it to a vote.

Connecticut officials say that about three-quarters of the state's businesses with fewer than 100 workers have no retirement plan, and owners cite high administrative costs as a key reason. Wyman estimates that fees charged by a state-sponsored plan could run 50 percent below the typical plan offered on the private market.

However, the idea is not popular with some small businesses, especially those that sell retirement plans. The National Federation of Independent Business in Connecticut opposes it, said NFIB's Andy Markowski. The idea is "untested, untried" and would put the state "in direct competition with small businesses who already provide this service," he said.

Albert B. Crenshaw wrote for the Washington Post business section for 24 years.