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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.

• Nine in 10 workers value the ability of their employer to contribute to their retirement, which is not allowed under state-run IRAs
• Eight in 10 workers say investment variety and education are important DC features — not offered in most proposed state-run plans
• Nine in 10 employees value investment diversity (at this point, investment options are unclear in state run proposals)

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.