As Oregon launches a program to help private sector workers who lack workplace retirement plans to save for their futures, the rates of eligible employees taking part—those who do not choose to opt out—suggest a promising beginning.
Oregon and four other states—California, Connecticut, Illinois, and Maryland—have enacted initiatives to address the fact that many workers lack access to retirement savings plans. Policymakers expect the programs to help reduce economic insecurity for future retirees, as well as the burdens on government-funded social safety nets.
OregonSaves—the first of these programs in place—completed its initial wave of enrollment, covering thousands of eligible workers, in late 2017. The early efforts focused on enrolling workers at large employers; those at progressively smaller companies will join over the next two years. The state expects the program to eventually provide savings-plan access for nearly 800,000 workers at more than 64,000 employers.
Under the program, eligible workers are automatically enrolled in an individual retirement account, known as an auto-IRA, although they can opt out. The accounts are privately managed by a third-party investment firm. OregonSaves sets a default employee contribution rate at 5 percent of pay, which can be adjusted by the employee. Under the default investing approach, which can be adjusted by participants as well, the first $1,000 goes into a capital preservation fund, which seeks to maintain value first and return second, while subsequent deposits go into a target date fund that invests assets with the estimated retirement year in mind.
The number of workers who choose to participate is a critical factor in the program’s long-term sustainability. The OregonSaves “Annual Report to the Legislature” for 2017 says the program had an opt-out rate of 25 percent in the first pilot, which started July 1 and consisted of 178 employees, and 30 percent in the second, which started Oct. 1 with 2,478 more workers. Combined, that represents a 71 percent participation and 29 percent opt-out rate. Since then, the participation rate appears to be growing. Bloomberg recently reported that as of Jan. 24, 19,230 out of 24,139 first-wave employees were participating—a rate of 80 percent.
Oregon’s initial feasibility study projected participation rates of 78 to 85 percent, depending on plan design. Similarly, California’s initial feasibility study surveyed a sample of workers subject to the program and estimated a 74 percent participation rate. The California question assumed a 5 percent default contribution rate for workers. Connecticut’s feasibility study, based on a benefit-enrollment experiment of workers, estimated 81 percent participation with a 6 percent default contribution rate. Oregon’s early opt-out rate of about 20 percent is very much in line with these numbers.
A nationally representative survey conducted by The Pew Charitable Trusts in 2016 found a similar response among those without plans who were asked about a hypothetical auto-IRA program sponsored by their state with a 6 percent contribution rate. Some 64 percent of respondents said they would definitely participate, while 24 percent said they were unsure what they would do. Just 13 percent said they would definitely opt out.
The participation rates are also similar to the existing market for 401(k) plans that serve small employers. According to a 2017 report from the investment firm Vanguard, automatic enrollment participation rates for small plans—those with $20 million in assets or less—are about 82 percent, for an 18 percent opt-out rate. The report shows that similar plans without automatic enrollment had a lower participation rate of 57 percent.
The Vanguard data point to various factors—such as industry and income—that appear to be associated with opt-out rates. For example, the employee opt-out rate reported in the “ambulatory health care” category—jobs associated with outpatient care—was 29 percent, compared with just 10 percent for jobs in “education and health.” In terms of income, those making less than $30,000 a year had a 28 percent opt-out rate, while those earning at least $100,000 had an opt-out rate of 8 percent.
Age and job tenure also play a role. Opt-outs in the Vanguard analysis were 27 percent for those under 25 but almost half that—14 percent—for those 55 to 64 years old. Some 24 percent of those who had been in their jobs for a year or less opted out, while just 7 percent of those in their jobs for at least 10 years did so.
Making these comparisons requires some measure of caution. Survey data or feasibility studies can differ from actual state experiences because surveys rely on self-reporting and experiments are necessarily contrived and may not perfectly capture real-world behavior. Similarly, it can be difficult to compare these programs with existing private sector market plans that may have participation incentives such as employer contributions. Consequently, opt-out rates for those plans are likely to be somewhat lower than for an auto-IRA, which does not allow employers to contribute.
The Oregon program is just getting started, with limited data available at this point. The numbers could very well change as employees engage with the program or as smaller employers join in the coming years. But the early indications point to a promising launch for a new approach to helping private sector workers save for retirement.
John Scott is the director and Andrew Blevins is a principal associate with The Pew Charitable Trusts’ retirement savings project.