Practical Research on Public Sector Benefits
State Retirement Savings Initiatives
Do More than Enhance Retirement
Security for Private Sector Workers
Segal Study Estimates How Increased Retirement Savings
Can Offset the Cost of Medicaid
For many Americans, retirement security seems like an impossible dream. Nearly half of America’s
private sector workers do not have access to a workplace retirement plan, according to the
U.S. Census Bureau.
Another federal agency, the United States Government Accountability Office (GAO), found that
roughly half of private sector workers actually participate in a workplace retirement savings
program. The GAO also found that most of those who do not participate (68 percent) reported
working for an employer that did not offer a program.1 Those statistics are cause for concern
because study after study demonstrates that having access to a retirement saving plan at the
workplace and contributing through payroll deduction is the most effective way for workers to
build retirement savings.2
Percentage of Private Sector Workers Whose Employers Offer a Retirement Plan
51%
Yes
49%
No
Source: U.S. Census Bureau Current Population Survey (CPS), March 2014 Supplement, using DataFerrett,
the Census Bureau’s data analysis and extraction tool.
1
See Retirement Security: Federal Action Could Help State Efforts to Expand Private Sector Coverage (September 2015).
2
E xamples include the GAO report to Congress noted in footnote 1 and these other GAO reports: Retirement Security:
Better Information on Income Replacement Rates Needed to Help Workers Plan for Retirement (March 2016) and
Retirement Security: Low Defined Contribution Savings May Pose Challenges (May 2016).
Winter 2017
Some States Are Addressing the Problem
Over the past several years, a number of states have looked at how to make retirement attainable. One option is to create
a path to workplace retirement savings. Another approach is to give individuals access to a retirement plan “marketplace.”
California, Connecticut, Illinois, Oregon, Maryland and Massachusetts are at varying stages of establishing workplace
payroll-deduction individual retirement account (IRA) programs. Under these programs, private sector employers that do
not offer a retirement plan will be required to enroll their employees in the state-sponsored plan. Employees can choose
to opt out, but most are expected to participate because studies show that a large majority of individuals who are
automatically enrolled in workplace savings plans do not opt out.3 Only employees can contribute to their IRAs. In August
2016, the U.S. Department of Labor (DOL) issued final regulations that provide guidance on how state-administrated
payroll deduction IRAs can comply with federal requirements. (That guidance is summarized in the text box below.) At the
same time, the DOL proposed an amendment to the final rule that would allow large cities or counties with populations
larger than Wyoming, the least populous state (586,000 residents in 2015), to establish similar programs under specific
circumstances. In December 2016, the DOL issued final regulations for large cities and counties.4 New York City and
Philadelphia are exploring options.
New Jersey and Washington are setting up marketplace websites to facilitate retirement savings. This option sets up an
online shopping network that individuals can go to select a retirement savings provider. Participation is voluntary and the
products offered are reviewed by the state using a set of guidelines.
Final Rule on State Savings Programs for Private Sector Workers
The Employee Retirement Income Security Act of 1974 (ERISA) supersedes state laws that relate to employersponsored benefit plans. This is referred to as an “ERISA preemption.” The DOL’s final rule provides states with a
new safe harbor that treats programs requiring employers to establish payroll-deduction IRAs for private sector
workers as not covered by ERISA.* Consequently, the programs are not preempted by ERISA. Under the safe
harbor, employer contributions to employees’ IRAs are not allowed.
The final rule, which took effect on October 31, 2016, makes a few clarifying changes to the proposed rule that was
issued in 2015.** Those changes provide additional flexibility and ease administration for states and employers. For
example, the new safe harbor allows programs to mandate the participation of all employees of employers that do
not offer some other workplace savings arrangement rather than applying only to employees who are not already
eligible for some other workplace savings arrangement, so that employers need not determine whether an employee
should participate in the program on an employee-by-employee basis. In addition, the safe harbor allows employers
to be reimbursed for a reasonable approximation of a typical employer’s cost for the program, rather than requiring
that employers be reimbursed only for their actual costs as determined on an individual basis for each employer.
Although the final rule makes it clear that states will not face an ERISA preemption challenge from the DOL, courts
may be asked to decide whether the DOL’s safe harbor is permissible under ERISA.
*F
or a summary of the final rule, which was published in the August 30, 2016 Federal Register, see Segal Consulting’s November 7, 2016
Update, “Federal Rule Helps States Move Forward on Retirement Savings Programs for Private Sector Employees.”
** T
he proposed rule and a related Interpretive Bulletin were discussed briefly in Segal’s November 19, 2015
web posting, “Guidance on State Savings Programs for Private Sector Employees.”
3
A July 2016 Oregon Market Research Report by the Center for Retirement Research at Boston College and a May 2016 GAO report,
Retirement Security: Low Defined Contribution Savings May Pose Challenges, addressed automatic enrollment.
4
T he final regulations for these “qualified political subdivisions” were published in the December 20, 2016 Federal Register.
2
Segal Consulting | www.segalco.com
Winter 2017 Study of Medicaid Savings
The result of ... [Segal’s] analysis showed a positive
correlation between increased retirement savings
sufficient to remove a percentage of currently vulnerable
households off the poverty rolls by the time they retire,
and a reduction in Medicaid spending.
Potential Medicaid Savings Are Meaningful
As states look at programs to build retirement savings, they are also asking how a population better
prepared for retirement would affect public safety-net programs. Medicaid is the program in which
there is greatest interest in estimating potential savings associated with greater retirement savings
because it continues to be a major and growing piece of state budgets.5
Segal Consulting conducted a study of states and the District of Columbia to estimate the impact
of expanded retirement savings by individuals not currently participating in a retirement plan on future
Medicaid expenditures. Segal’s actuarial model used available data on Medicaid, savings rates
and data by income level from the current census to estimate the impact of increased savings on
Medicaid participation rates at retirement. For details about the analysis, see the study methodology
supplement to this report.
The result of the analysis showed a positive correlation between increased retirement savings,
sufficient to remove a percentage of currently vulnerable households from the poverty rolls by the time
they retire, and a reduction in Medicaid spending. The table on the next page shows estimated savings
in Medicaid payments by states and the District of Columbia for the first 10 years after a retirement
savings program is introduced. Over that period, 15 states would save more than $100 million each,
with total projected savings if available in all states approaching $5 billion in the first 10 years.
A successful retirement savings program will take time to implement fully and would thus have
a gradual, yet effective, impact on the percentage of households that retire poor enough to be
Medicaid eligible. We assumed such a program would incur savings starting at a modest 1 percent
reduction in spending for workers currently aged 64 (i.e., those retiring next year) and grading up to
5 percent for workers currently aged 60 (those retiring five years from now).
There are different pathways for a person over the age of 65 to become eligible for Medicaid, which
vary by state. Segal’s analysis of potential savings is conservative and limited in that it does not factor
in all states’ eligibility nuances for Medicaid. In addition, it does not assume that Medicaid will never
be accessed because of the increased savings, but that eligibility may only be delayed.
Over time, as individual accounts grow, the potential for savings on state Medicaid expenditures
increases exponentially. We do not show projections for the second and third decades of retirement
savings programs because projections over that long horizon are less reliable given the possibility
that programs may change during that period.
5
According to the National Association of State Budget Officers’ Fiscal 2013–2016 State Expenditure Report, Medicaid
accounted for 27.4 percent of state spending in fiscal 2015. Spending on Medicaid increased 15.1 percent from fiscal
2014 to fiscal 2015.
Segal Consulting | www.segalco.com
Winter 2017 Study of Medicaid Savings
3
Estimated Reduction in State Medicaid Expenditures Resulting from Retirement Savings
for the First 10 Years in Millions of Dollars*
Alabama
33.6
Montana
26.6
Alaska
18.2
Nebraska
29.4
Arizona
59.3
Nevada
28.2
Arkansas
30.6
New Hampshire
36.2
California
604.7
New Jersey
Colorado
121.6
New Mexico**
268.6
N/A
Connecticut
65.1
New York
534.9
Delaware
11.3
North Carolina
96.0
District of Columbia
13.4
North Dakota
9.3
Florida
226.6
Georgia
64.9
Oklahoma
28.6
Hawaii
21.1
Oregon
58.7
Idaho
19.5
Pennsylvania
349.6
Illinois
243.8
Rhode Island
19.6
Indiana
128.7
South Carolina
29.3
Iowa
72.8
South Dakota
14.9
Kansas
51.9
Tennessee
53.1
Kentucky
31.2
Texas
329.7
Louisiana
51.1
Utah
20.3
Maine
13.2
Vermont
9.5
Maryland
114.6
Virginia
94.2
Massachusetts
110.5
Washington
58.6
Michigan
130.6
West Virginia
19.6
Minnesota
124.5
Wisconsin
96.4
Wyoming
17.5
Mississippi
Missouri
11.0
Ohio
129.6
105.4
* Savings reflect the total present value.
** Comparable enrollment and spending data for New Mexico was not available when the study was conducted.
Source: Segal Consulting, 2016
4
Segal Consulting | www.segalco.com
Winter 2017 Study of Medicaid Savings
The results of Segal’s study suggest states
could yield meaningful savings on Medicaid
spending by offering a retirement savings
plan for private sector workers.
Jurisdictions Without a Retirement Savings Plan for Private Sector Workers
May Want to Consider the Offering
The results of Segal’s study suggest states could realize meaningful savings on Medicaid spending
by requiring a retirement savings plan be available for private sector workers. Key considerations
include the following:
• P
articipation Will participation be mandatory? If not, will non-participating employers be incented
to participate?
• D
esign Will employees be allowed to opt out of participation? Will the annual contribution rate
increase over time?
• A
dministration Which agency or entity will administer the plan?
• C
ommunication How and how often will individuals be informed about the benefits of participation?
Setting up a payroll IRA program is an enormous undertaking. For a mid-sized state, the number of
employers that could be covered by the mandate could exceed 50,000 and the number of employees
that could potentially be enrolled might exceed 500,000. For a very large state program, such as
California, the potential number of eligible workers is estimated to be 6.8 million.
Segal Consulting | www.segalco.com
Winter 2017 Study of Medicaid Savings
5
How Segal Can Help
For such a large and important undertaking, expert assistance can be critical. Segal has consulted
with several states on how to design and implement retirement savings plans for private sector
workers. We assist potential program sponsors by:
• A
nalyzing and recommending both plan and program design features. Typical considerations for
the plan design include eligibility, contribution targets, ease of participation, the benefit structure,
and the potential for using “auto features,” such as automatic enrollment, automatic escalation and
default investment. Program design is more operational in nature and looks at the nuts and bolts
of communicating the program to covered employers and employees as well the mechanisms
associated with withholding and remitting payroll contributions.
• D
esigning a participant-friendly investment structure and advising on its oversight, monitoring
and governance.
• C
onducting an actuarial analysis of state savings that might accrue as the result of enacting a
program. For example, an actuarial analysis, like the one discussed in this report, can estimate
potential Medicaid cost savings if a program were enacted.
• A
ssisting with the request-for-proposal process to select service providers to conduct the various
administrative and operational activities associated with operating a program of such potential size
and complexity. Additional critical services include assessing the capabilities of potential partners
o handle the onboarding of thousands of employers and assisting with the program enforcement
including the identification of employers that are not in compliance with program requirements.
• E
valuating the feasibility of the program from a cost/benefit perspective and providing commentary
on whether the program will comply with applicable federal laws and regulations, subject to
counsel’s review and approval.
Questions? Contact Us.
If you have questions about this study or how Segal can help your jurisdiction to offer
retirement savings plans for private sector workers, contact your Segal consultant or
one of the following experts:
• Cathie Eitelberg, National Director, Public Sector Market
• W
endy Carter, National Public Sector Defined Contribution Practice Director
• Rocky Joyner, ASA, MAAA, FCA, EA
To receive Data and other Segal publications, join our email list.
6
Segal Consulting | www.segalco.com
Winter 2017 Study of Medicaid Savings
Segal Consulting Understands
the Public Sector
Public sector entities face tough decisions. We understand those challenges as well as options for
meeting them. Having worked with hundreds of public sector clients for more than 50 years, we have
insight into the spectrum of design characteristics and features of all types of compensation and
benefit plans throughout all levels of government. We provide the following services:
• H
ealth and welfare plan consulting for active and retiree coverage, including pharmacy
benefit management,
• D
efined benefit and defined contribution retirement plan consulting, including plan design
and modeling,
• C
ompliance consulting,
• B
enchmarking and design of total rewards that encompass financial and non-financial rewards,
• P
articipant communications, including personalized statements,
• A
dministration and technology consulting,
• Investment solutions services through our SEC-registered affiliate, Segal Marco Advisors, and
• Insurance brokerage services for fiduciary liability insurance, fidelity bonds and cyber liability
insurance through Segal Select Insurance Services, Inc.
Segal Consulting is a member of The Segal Group. See a list of Segal’s offices.
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