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You’ve seen and heard it all before. You’ve probably even joined in.
How many times have you made fun of organizations that give participation trophies to everyone just to avoid damaging the fragile egos of those who didn’t win?
If you’re like many people, this cavalier dismissal of merit and achievement makes you shake your head.
Now, imagine the same attitude applied to your retirement. You get a trophy just for participating in the nearest retirement savings vehicle available to you.
Do you think that trophy is enough to fund your retirement?
A recent academic study just declared the country’s first state-mandated private employee retirement plan has earned well-deserved praise. Why? Because it successfully achieved its goal of getting more people to save for retirement.
The researchers concluded “OregonSaves is generating savings for a substantial number of participants” primarily by making it easier to save.
The paper states compulsory registration for firms with more than one hundred employees began October 1, 2017. The authors note “Over 67,700 participants accumulated more than $51 million dollars through April 2020, resulting in an average account balance of $754.”
Look at that last number again.
After two-and-a-half years, the average account balance is only $754. Is that good enough for your retirement?
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The real truth is revealed in the study’s final sentence: “Less clear is whether these accounts will eventually grow into important vehicles for retirement saving.”
With many more states either already taking the OregonSaves route or contemplating it, you have to ask yourself if a participation trophy is all you need to retire in comfort.
Despite its best intentions, OregonSaves may be seen more as an instruction of highlighting the mistakes to avoid rather than being seen as a template others should follow.
“The 5% savings default may only be optimal for a handful of employees. Many should be saving more, particularly if they are nearing retirement and were not previously contributing to a retirement account,” says Michael Finke, Professor of Wealth Management at The American College of Financial Services in King of Prussia, Pennsylvania.
Your real hope comes in a company-sponsored plan. It can offer you much more than a state-sponsored plan.
With OregonSaves, Financial blogger Jason B. Ball of JasonFinTops in West Linn, Oregon, says you get “no company match, only a Roth IRA option and contribution limits. A standard 401(k) may be a better option or a number of other small business plans may be a better fit for the business and employees.”
Worse, the negative aspects of state-sponsored plans can also be seen in both the costs involved and the services received.
“When you look at the fees, roughly 1% per year,” says Tolen Teigen of Financial Decisions, Inc. in Stockton, California, “many financial professionals charge this as their fee. With many financial advisers, you will also get a ‘coach’ to help you stay on track and increase your savings over time. With the state-sponsored plan, you are paying the same ‘private’ fee, but not getting personal guidance and coaching along the way.”
While the company sponsored option might be best, OregonSaves emerged because too few companies were offering retirement plans.
“What you should be concerned about is not having a retirement plan at work,” says Nevin Adams, Chief Content Officer for American Retirement Association. “If you do have one, then the state-run plan shouldn’t matter. And even if you don’t, it’s entirely possible the mandate associated with these programs might instead encourage your employer to offer a plan. But you might want to check out what kind of Roth IRA program you can get on your own, setting up your own individual payroll deduction before getting swept up in the flow.”
Fortunately, new laws may provide a more sustainable alternative to state-sponsored retirement plans.
“The SECURE Act allowed small business owners to join together to form a pooled employer plan, or PEP, that could provide many of the benefits of a larger plan such as lower administrative costs and institutional pricing on plan investments,” says Finke. “As more companies provide PEP options, it may be possible to mandate retirement savings plans using private, rather than state, plan providers. A combination of fiduciary liability and competition among investment companies led to a sharp decrease in costs in defined contribution plans, and PEPs could preserve these advantages for small employers.”
One of the dilemmas of state-sponsored plans is they appear to advocate a “one-size-fits-all” solution. You need to be careful you don’t fall under the same misconception when considering alternatives. Every situation is different. What you need may be different from what the neighbor next to you needs.
Still, the traditional 401(k) plan is hard to beat.
“Viewpoint makes some alternatives more attractive; others less so,” says R. L. “Dick” Billings of Fiduciary Wise, LLC in Gilbert, Arizona. “For all the challenges of participant-investment-directed 401(k) and ERISA 403(b) plans, overall, they are the best for the following reasons:
- Match and non-elective employer contributions;
- Higher deferral and employer contribution limits;
- Oversight/assistance by one or more fiduciaries;
- Limited ability for a participant to access funds prior to retirement;
- Ability for a participant to borrow funds and avoid a taxable distribution;
- Economies of scale with regards to pricing;
- Discrimination testing that favors Non-Highly Compensated employees
- And probably other reasons that escape me right now!”
The bottom-line: no matter what, your circumstances remain the same. It’s not enough that you participate in a retirement savings plan; it’s that you save enough in that plan.