Four states—California, Illinois, Oregon and Washington—have passed laws paving the way to offer state-run retirement plans, and 18 additional states are considering such a measure. And on Monday, the Department of Labor issued its much-anticipated guidance on state-run plans.
The reason why the states are interested in offering retirement plans is that “the number of people in the workforce not covered by any retirement plan is pretty staggering—around 50%,” says Richard Hiller, senior vice president and head of national government and religious markets at TIAA-CREF in Denver.
“If people get to the point where they can’t work and they don’t have any resource other than Social Security, the states are going to wind up having to provide some kind of social assistance to these people, and this is extremely expensive for the state and the taxpayer,” he says. If half of American retirees are below the poverty line, it has even broader economic consequences that will affect everyone, Hiller adds.
People without access to workplace retirement plans will undoubtedly be looking for assistance when it comes time for retirement, “which begins at the state and local level,” agrees Chad Parks, chief executive officer of Ubiquity Retirement + Savings in San Francisco. “It is a preemptive move.”
Parks thinks the ongoing development of auto-enroll Individual Retirement Accounts (IRA) or other approaches taken by states, perhaps the creation of a state-run multiple employer plan, will not only benefit workers but retirement plan providers and advisers as well. He estimates that in states where offering a retirement plan becomes a requirement, one-third of employers will implement a 401(k) plan, one-third will turn to IRA payroll deduction because it is less expensive, and the remaining third will use whatever program the state puts forth. “From a private industry standpoint, we should be excited because two-thirds will turn to us, and helping the state run the program also provides opportunities,” Parks says.
NEXT: Opinions vary on likely impacts
However, not everyone in the retirement plan industry views state-run retirement plans as a positive. “It would be better to have it at the federal level, because the state programs will be different and some employers might have employees in different states,” says Judy Miller, executive director of the ASPPA college of pension actuaries and director of retirement policy at the American Retirement Association in Arlington, Virginia.
Then there is the issue of the Department of Labor’s (DOL) apparent willingness to permit state-run retirement plans to be exempt from the Employee Retirement Income Security Act (ERISA), which Miller feels would create an uneven playing field and give the state-run plans an advantage and potentially expose investors to risk, Miller says. There will be two options that states will be permitted to offer, Miller says. “The first is an automatic IRA [payroll deduction] program that will not be subject to ERISA because it will not be considered to be an employer arrangement,” she says.
Paula Calimafde, chair of the retirement plans, employee benefits and government relations practice at Paley Rothman in Washington, agrees with Miller that relieving states of having to comply with ERISA standards is unfair to privately run retirement plans: “DOL’s new regulations provide that the state-run programs are not subject to ERISA, while those plans sponsored by the private sector are,” Calimafde says. “For the DOL to tilt the playing field towards state-run retirement plans and against the private sector is offensive. Employee Benefits Security Administration chief, Phyllis Borzi, explained this by saying she has ‘absolute confidence that the state has the best interest of its citizens in mind.’ While this is probably true, as we all know, there is often a huge gap between intentions and results.”
Likewise, the American Retirement Association (ARA) issued a statement following the DOL’s release of its guidance and a related interpretive bulletin explaining that ERISA preemption leaves room for states to take a variety of approaches to expanding access to retirement planning tools in the workplace. ARA said that DOL’s proposal “modified the current payroll deduction safe harbor to allow automatic enrollment provisions without making the plan an ERISA arrangement, if there is a mandate to offer the plan and the state plan is the default option. This would now allow states to mandate these offerings without the protections and fiduciary oversights ERISA provides.”
The second state-run offering the DOL is permitting is a multiple employer plan (MEP) that some feel will also create an uneven playing field because it will not be subject to the DOL requirement that “MEP plans can only be in existence if the employers have something in common other than belonging to that plan, such as being in the same industry or belonging to the same association,” Miller says.
NEXT: Different approaches for different states
States are also coming up with diametrically different models, says Chad Carmichael, principal consultant at North Highland in Charlotte, North Carolina. He believes the model that California has used, tying its state-run retirement plan into its CalPERS state pension plan “is compelling” and “makes the most sense for closing the coverage gap because the plan is already established.”
“You have the fiduciary components that are needed already established,” he says, “and if they can plug into their pension resources with common investment trusts, that costs less than establishing a brand new plan.”
Hiller says the model that is furthest along is in Illinois. “It is an IRA-based structure, and the funding vehicle is less important than some of the other provisions,” he says. “Most importantly, it has a provision where employees are automatically enrolled into the plan and have to elect to opt out. That is a key provision. Facilitating necessary savings is desperately needed in this country.”
The Financial Services Institute is concerned that because the state plans exclude the input of a retirement plan adviser, they could put workers at a great disadvantage, says David Bellaire, executive vice president and general counsel at the Institute, based in Washington. “One of the most important factors in an investor’s chance of succeeding in building adequate retirement savings is working with a financial adviser,” Bellaire says. “They need that personalized advice to help them keep their focus on the long-term goal of a dignified retirement. A personal financial adviser can help them with so many important questions, such as when to start saving, how much to save to have the kind of retirement they want, and what to do when the market is crashing. A state-run plan cannot provide that kind of help and support.”
Finally, Brad Campbell, counsel at Drinker Biddle & Reath, is concerned about how very different each state’s retirement plan could end up being. “This will establish a new marketplace and create winners and losers, but it is hard to predict who they will be because it depends on what the states do,” Campbell says. “The long-term effects of having 50 different state regulators doing 50 different things raises questions about how it would impact service providers, costs, fees and worker protections.”
Written comments for the proposed new rule are due to the DOL by January 19, 2016.