Retirement: Update on State-Run IRAs

June 8, 2017 4:10 PM
By Brian Dobbis

Programs that already have been established could face stiff headwinds from Washington.


With thousands of baby boomers turning 65 every day, insufficient savings rates among all Americans, and doubts about the future sustainability of Social Security, much has been written about an approaching “retirement crisis.” We think, in terms of clarity, that additional perspective is in order.

At first blush, one might draw some encouragement from data that show Americans, overall, have saved more than $25 trillion in tax-advantaged retirement accounts, of which $15 trillion are held in defined contribution plans and IRAs. Unfortunately, as we discussed in last week’s column, millions of full- and part-time private-sector workers lack access to an employer-sponsored retirement plan. The issue, in my view, isn’t saving for retirement—rather, it’s that too few private-sector works are covered by a 401(k) or similar plan.

Over the last few years, a number of states (California, Oregon, Washington, Illinois, Maryland, New Jersey, Connecticut, and Vermont) have enacted programs widely referred to as “state-run retirement plans” or “state-run auto-IRAs,” in an effort to narrow the coverage gap.  However, no cities have established such plans yet, though some, such as New York City, have proposed them.

Frankly, state legislatures are concerned—and rightly so, we believe—about how unprepared an aging population is for retirement. Without a nest egg to draw on, many more older citizens will likely have to turn to state-run programs and services to subsist on, thereby increasing costs across the board for taxpayers.

While these state-based designs are more or less a patchwork of retirement policies, the overarching principle is the requirement that employers who do not currently offer a workplace retirement plan (e.g., 401(k), SEP, SIMPLE, etc.) provide a payroll-deferral IRA for their employees. In addition, the plans are designed to allow employees to raise or lower their contributions as well as opt out.

So far, eight states have approved offering these retirement plans, and just last month a ninth state, Vermont, passed a bill creating a voluntary public retirement option called the Green Mountain Secure Retirement System. But recent legislation signed into law by President Trump repealed previous Department of Labor (DOL) regulations instituted during the Obama administration. The DOL regulations released late in 2016 had provided a safe harbor from ERISA (Employee Retirement Income Security Act of 1974) for state- or city-run plans that require private-sector employers to establish payroll-deduction IRAs for workers without access to an employer-sponsored retirement plan. Trump signed a resolution overturning a DOL rule that would allow cities and municipalities of states to offer automatic-IRA retirement plans for private-sector employees that would be exempt from ERISA provisions.

Concerns about ERISA oversight had been a major barrier in trying to get these state-based plans established, and the DOL regulation had cleared the way by offering an ERISA safe harbor. This recent legislation is a significant, but not fatal, blow to state-run plans. States can still offer these plans, but how they can steer clear of ERISA without the DOL safe harbor remains to be seen. While some states are being cautious, others (California and Oregon, in particular) have vowed to continue their implementation. 

Most would agree that expanding coverage to private-sector workers is a good thing. However, there is considerable debate over who should run these plans. Should state governments get involved in the business of retirement savings, or should it be handled by the private sector (e.g., asset managers, insurance companies, etc.)?

A 2017 Pew Research survey explored the reasons small and mid-sized businesses do not sponsor qualified plans, and asked business owners about their support for the auto-IRA proposal with different entities sponsoring the program. Support proved highest if a mutual fund (82%) or insurance company (72%) sponsored the auto-IRA plan. Government sponsorship was the least favorite option.

These state programs are likely to bring about a greater awareness on the part of small and mid-sized employers, emphasizing the importance of building a nest egg for both the owner and their employees in preparation for retirement.

Whether they gain momentum is another matter. Which auto-IRA program would you favor—one run by the state or one from the private sector?

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