State-Run Auto-IRAs Will Help Close the Coverage Gap

Sources view state-run retirement savings plans as useful for improving retirement readiness, as well as a potential business opportunity for advisers.

Art by Kiki Ljung

Experts view the state-run payroll deduction individual retirement account (IRA) programs as a positive for the nation in terms of helping to bridge the coverage gap, as well as a source of potential future clients for retirement plan advisers.

Because the businesses being mandated to join these programs, in Oregon, California and Illinois, wouldn’t otherwise have offered their workers a retirement plan, the experts do not view these state-run auto-IRAs as competition to advisers.

The states that are offering these plans “recognize that we clearly have a problem, with not enough workers having access to a retirement plan,” says Melissa Kahn, managing director of retirement policy strategy for State Street Global Advisers in Washington, D.C. State Street is the primary investment manager for the programs in Oregon, California and Illinois, Kahn notes. These states realize that they will face strains on their social insurance, food assistance and Medicaid if they do not help their residents who are not saving for retirement do something, Kahn says. “Because the federal government has not acted yet, they are stepping into the void.”

The opt-out rate in all three states is higher than it is in traditional 401(k) plans with automatic enrollment, but at roughly 23%, it is a testament that many people being enrolled in state-run auto-IRAs are happy for the assistance, says Kevin Boyles, vice president, business development, small business solutions at Millennium Trust Company in Oak Brook, Illinois.

Boyles says that a survey his company recently conducted among 500 small businesses without a retirement plan found that 45% never looked into offering such a plan. “The 55% that did look into offering a retirement plan only considered 401(k)s, but in the end, did nothing because they felt they were the wrong solution for their business,” Boyles says.

These state-run auto-IRAs will go a long way towards helping with the coverage gap in this country, he says, noting that there are 5.5 million businesses in the U.S. but only 550,000 401(k) plans.

However, on the down side, according to Boyles, there is no uniformity among these types of plans, so for a company doing business in multiple states, it could be very confusing to manage them. Additionally, state-run auto-IRA plans are only likely to be offered in states where the majority of the residents voted for a Democratic presidential candidate, as Republicans do not like government-run programs like ObamaCare, Boyles says.

As for whether or not advisers should view state-run auto-IRA plans as competition, Erik Daley, principal with Multnomah Group in Portland, Oregon, says they definitely should not. In fact, “potentially, over time, they could turn into an opportunity for retirement plan specialists to generate new clients,” Daley says. “While it is too early to tell how these plans will develop, it will be interesting to watch if small employers see strong savings behaviors and decide to transition to a qualified retirement plan.”

Kahn believes that as assets grow in these state-run auto-IRA plans, they “definitely will present a great opportunity for advisers to come in and say to employers, ‘You have this state program that you are in. We think you are ready to take the next step and create a more robust plan. We can give you something we think is even better for you, and that will allow you to save more money. We can provide the guidepost and fiduciary advice to help you navigate the system.’ Employers will need that assistance, because ERISA [Employee Retirement Income Security Act] rules can be complicated.”

Peg Creonte, senior vice president at Ascensus in Boston, which created the platforms for these three initial state-run auto-IRA programs, says her firm “really believes that these can become an important component of the savings landscape in America. We believe that over time, as an employer grows its plan and its employees get more comfortable with setting aside money, they could become a source for financial advisers to pursue selling qualified plans to these businesses.”

As for whether or not these state-run plans will have the same take-up rate as SIMPLEs or SEPs, which are voluntary, Alicia Munnell, director of the Center for Retirement Research at Boston College, says she hopes they don’t. “The take-up rate on SIMPLEs and SEPs has been miniscule,” she says. “They are well intended, but have had no real impact on reducing the coverage gap. I hope a substantial number of people become covered by these new IRAs and they do a lot more because we have a huge coverage gap in this country.”