Oregon Government Rips Off Workers
By David Henderson
One myth – perpetuated by the National Employment Law Project – is that state mandates expand opportunity to retirement savings, especially for low-income workers. They don’t. OregonSaves initially defaults worker contributions into a conservative capital preservation fund before redirecting contributions to a life-cycle fund once balances exceed $1,000. Since inception in 2004, the capital preservation fund has offered a paltry nominal return of 1.52% (essentially an inflation-adjusted return of 0%). OregonSaves also assesses an administrative fee of 100 basis points (that is, 1%) regardless of investment choices, further diminishing this return. This set-up isn’t really an opportunity for Oregon workers, because they already have access to Roth IRAs and investments with a more beneficial set-up. A 25-year-old worker might actively choose a life cycle fund with no minimums for initial investment or additional contributions, along with administrative fees of 75 basis points, significantly lower than OregonSaves. Choosing an index fund that tracks the S&P 500 could have administrative fees as low as 1.5 basis points. Without mandating Oregon employers to enroll their workers, OregonSaves would struggle to compete in a vibrant marketplace with many inexpensive alternatives for retirement contributions.
This is from Aaron Yelowitz, “Government Mandated, State-Run Auto IRAs Can Cause Real Harm,” Cato at Liberty, March 22, 2019.
The most striking thing to me in the above quote is the fact that OregonSaves charges 1% of the investment. If workers instead invested with Vanguard in, say, the Total Stock Market Index, they would pay a small fraction of this. If they could get together $5,000, they would pay 0.035%, which is only 3.5% of what Oregon’s state government charges. The government is essentially ripping off workers big time.
Moreover, Yelowitz points out something else that I tell young people who are trying to save for retirement: pay off your high-interest credit cards first. He writes:
Financial planning websites consistently emphasize paying off revolving high-interest debt before saving for retirement (unless a company offers a match rate), yet auto-IRAs fail to take these investment lessons into account. Advocates for government mandates emphasize the benefits of compounding for assets in an IRA, while curiously ignoring the reality that unpaid debt compounds in the exact same manner! At an 18% interest rate, an unpaid $5,500 credit card debt would mushroom to $28,800 in ten years. The same amount of money directed towards OregonSaves might accumulate to $12,900 under rosy assumptions about investment returns. Ultimately, our study shows a significant number of workers are in situations like this, and auto-IRAs would do more harm than good for them.
Can employees opt out? Yes, but as behavioral economists often point out, many of them won’t. And they will be ripped off by State Treasurer Tobias Read.