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Workers value aspects of DC plans that might not be a part of state-run plans

A recent LIMRA Secure Retirement Institute study finds 30 percent of employers who offer a defined contribution (DC) plan say they are very likely to stop offering their defined contribution plan and have their employees enroll in a state-run retirement savings plan.

Employer interest in leveraging state-run plan differed based on the size of their DC plan. Plan sponsors with larger DC plans (over $50 million in assets) were more inclined than smaller DC plan sponsors (under $10 million in assets) to say they would replace their existing DC plan with the state-run plan (31 percent versus 22 percent).

The intent of the state-run retirement plans is to offer workplace retirement access to those who do not currently have it. Employers who drop their DC plan and shift their employees to a state-run plan may weaken their employees’ ability to save adequately for their retirement.

Many state-run plans are designed as individual retirement accounts (IRAs), which limit investors under 50 years of age to contribute $5,500 per year while DC plans allow up participants to contribute as much as $18,000 annually. Institute research finds 86 percent of workers feel it is important to be able to contribute more than $5,000 a year to their retirement savings. This could also undermine long-term retirement security.

An employee under age 50 making $75,000 a year saving 10 percent in their DC plan ($7,500 per year) would be limited to $5,500 a year in a state-run plan. Over the course of 20 years (excluding investment growth, fees, withdrawals, increases in salary, etc.) this amounts to $40,000 in lost retirement savings.

In addition, employees place high value on certain aspects of DC plans that may not be part of a state-run plan.

LIMRA Secure Retirement Institute conducted nationwide surveys of more than 1,000 employers that offer defined contribution plans and nearly 2,500 workers in 2016 to explore perceptions around state-run retirement programs. The results were weighted to reflect the US population.

For more information on the nationwide study, LIMRA members can read, Workplace Retirement Savings and State Plan Mandates.

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