Recently AARP South Carolina approached Dean Peter Brews, University of South Carolina Darla Moore School of Business about a feasibility study for a multi-employer retirement plan for South Carolina employees. This idea has worked well in other states where employees did not have access to a retirement plan through their employers. AARP South Carolina wanted to find out if this was a feasible plan for the Palmetto state and, if so, what it would cost based upon the projected participation.
Dean Brews recruited Moore School faculty and Dr. Mark Ferguson (Chair, Management Science), Dr. Sunny Park (Associate Professor, Management Science), and Dr. Mark Cecchini (Chair, School of Accounting) volunteered. After a preliminary interview, AARP South Carolina selected the Moore School team to assist them.
The results of the feasibility study were surprising. South Carolina is the worst state in the nation in regards to its citizens being adequately prepared for retirement. In fact, 70 percent of South Carolinians who work have no access to any type of retirement plan outside of Social Security. Almost 60 percent of employers have no retirement plan to offer their employees, yet 65 percent of these employers believe a multi-employer retirement savings plan would be a good idea. To better appreciate the impact, “research shows that South Carolina would save $37.5 million on public assistance programs between 2018 and 2032 if lower-income retirees save enough to increase their retirement income by $1,000 more per year.” i A small effort for a significant payout.
Considering that the driving factors of the program are dependent upon employers and employees, Dr. Park felt it essential to use behavioral economics in deterring the feasibility of the program. Behavioral economics is a relatively new field developed by Dr. Richard Thaler of University of Chicago. Dr. Thaler received a Nobel Prize in Economics for his idea that, unlike the standard economic models, individuals are not logical nor predictable when making financial decisions. He insists that emotions often color these decisions.
With this plan, small business would join together with the state taking on the fiduciary role based upon the economy scale and expense ratios. The state would accept bids for the positions of record-keeper and financial services. Start-up costs for the state would include marketing to employers and employer enrollment. With the voluntary multi-employer plan, employers who participate will auto-enroll their employees and begin payroll deductions to the state sponsored retirement plan. The employees will contribute a percentage of their salary to the fund, which will then be invested to create a profit for the participants. While employees are auto-enrolled, they do have the option to opt-out of the fund and/or to change the percentage of their income that they invest. Studies show that only about 20 percent of auto-enrolled employees opt-out and that the average percentage of savings is 4.5 percent.
Since the proposal contains a number of variables that affect the outcome, AARP South Carolina was presented with a dashboard tool where they can enter varying factors such as the number of employers and employees enrolled, the average rate of contributions, and investment returns to determine the break-even point for the program. Along with start-up costs, marketing, and employee contributions, it is projected that the break-even point for the program will be five – seven years.
The top selling point is that the program is a very cost-effective way to get more people to save for retirement. South Carolina doesn’t want to be the state with the lowest retirement savings. Other states are offering multi-employer plans and it is felt that most states will eventually have them available. If South Carolina puts this into place now, we will be part of the movement that makes these plans successful. This would be a boost for South Carolina. The general outlook was that the report would be helpful in moving the discussion forward.
i AARP Public Policy Institute analysis of Philip Trostel, The Fiscal Implications of Inadequate Retirement Savings in Maine (Orono, ME: The University of Maine Margaret Chase Smith Policy Center, February 2017), https://mcspolicycenter.umaine.edu/wp-content/uploads/sites/122/2017/03/final-aarp-report.pdf