For decades, expanding retirement plan access to employees of small businesses has posed a challenge for their employers as well as legislators. As of 2021, just half of workers for firms with fewer than 50 employees have access to an employer-sponsored retirement plan. In recent years, in the absence of meaningful federal efforts, all but three states in the U.S. have initiated or passed legislation to set up a state-sponsored retirement savings plan (SSRP). Among the most effective structures implemented so far are auto-individual retirement account (auto-IRA) programs, which allow for an effective combination of compulsory employer participation and automatic participant enrollment and payroll deductions, according to the latest Cerulli Edge—U.S. Retirement Edition.

The absence of not only employer-paid retirement benefits, but also the ability to contribute to a tax-advantaged retirement plan at all beyond retail options such as self-directed individual retirement accounts (IRAs), can be a significant financial disadvantage for workers who will need to rely on their own savings to fund their retirement. State governments, seeking to avoid stress on public finances from providing supplemental support to retirees with not enough savings, have begun to take action by initiating new legislation establishing SSRPs that draw upon auto-enrollment policies and employer mandates.

“The three state SSRSPs that already have garnered meaningful participation and net flows, CalSavers (California), OregonSaves, and Illinois Secure Choice, have done so through state auto-IRA programs,” states David Kennedy, senior analyst. Cerulli suggests that once these programs achieve their participation goals and program set-up costs have been recouped, other enhancements, such as quality financial wellness and education resources, could help to address challenges to saving beyond plan access.

“Most retirement plan participants today have access to a variety of tools and services that can help them address other important impediments to saving, such as budget planning services, or that can help manage complex financial tasks including portfolio construction and tax management,” adds Kennedy. “This means workers who lack access to a workplace plan are missing out on opportunities to grow their financial competencies—not just their account balances.”

Providers of state retirement plans, as well as state officials, should pay attention to the importance of dedicated financial education tools and resources and their effect on savings rate and overall employee financial well-being. But Cerulli believes that even if proven effective, adoption of enhanced services like these among SSRPs will take time. Private corporate defined contribution (DC) plan providers have invested substantial time, effort, and money into proprietary or third-party financial wellness platforms to help address these concerns. SSRPs still are in the process of proving their economic viability and recovering initial program set-up costs.

Cerulli believes as these programs continue to mature, they should look for ways in which they can leverage their scale to bring down the per-participant cost of these programs to levels not only still in line with one of the original intentions of these SSRPs—to lower participant fees in small retirement plans—but also to a point where they could further address impediments to saving and financial wellness.