With the start of a new year, many of you are making resolutions to contribute to a retirement savings account. Those who have a retirement savings plan through work, are far more likely to save for retirement than those who do not. Unfortunately only about half of Americans have access to a workplace retirement plan.
Oregon, as well as Illinois and California, is addressing this shortfall by offering a state sponsored plan. If Oregon businesses do not currently offer a retirement plan, they will be required to offer OregonSaves this year.
OregonSaves is a Roth IRA option. All the Roth IRA rules apply. You can only contribute up to the IRA limit, which is $6,000 for most and $7,000 if you are fifty or older. If you have a high income (more than $124,000 for singles and $196,000 for married couples), your ability to contribute at all will be curtailed.
However the program has put together a handful of investment options, and set up rules that require participants to opt-out rather than opt-in. Initial default contribution rates are 5 percent of salary, subject to the IRA limits. You’ll be able to select from a suite of target retirement date funds, a money market option and a growth fund. If you do not opt-out, you will be automatically enrolled in the program, without having to do a thing.
The result will be that more Oregon workers will have access to a convenient way to save, and hopefully savings rates will increase. But the fact of the matter is, you can do all of this yourself and do it at a lower cost. OregonSaves will collect 1 percent of your account value every year to cover investment and administrative expenses. That is high, given that plenty of fund companies offer similar investments at a lower cost.
The investments offered are all index funds, the type which can be had from most institutions. Vanguard, for example, offers a suite of target retirement date funds with an expense ratio of around 0.14 percent. That means you’ll keep an additional 0.86 percent of return every year over the similar investment options in OregonSaves. Over ten years, your account value would be about 9 percent bigger with Vanguard than OregonSaves on just the expense savings alone.
The automatic contributions with OregonSaves is definitely appealing, but you can arrange for that yourself too. Most employers allow you to have your paychecks direct deposited, and you can usually split your deposits among multiple institutions. There is no reason why you cannot set up a direct deposit to a Roth IRA account at any institution. If for some reason you don’t have that option, you can arrange for an automatic transfer from your bank to a Roth IRA to correspond with the deposit of your paychecks.
OregonSaves is a fine way for employers to offer a retirement savings option to their employees. It doesn’t cost them a thing, except for a bit of set-up upfront. However, it isn’t a great way for employees to save. If your employer will be signing up with OregonSaves this year, use the opportunity to take matters into your own hands. Open a Roth IRA account at your favorite mutual fund company, select a target date retirement fund that fits with your timeline, and have a portion of your pay direct deposited to it. You’ll accomplish better than the same thing as an account with OregonSaves.
Photo courtesy of Sharon McCutcheon on Unsplash.com
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