Editors' pick: Originally published March 6.
State-sponsored retirement plans - sometimes known as "secure choice" plans or "auto-IRA plans" - are facing opposition in Washington, D.C.
That's the case even though state-sponsored retirement plans have barely gotten off the runway.
The plans, available now in almost half of all 50 U.S states, generally allow private-sector workers access to a retirement plans, in the event they work for a company that doesn't offer 401(k)-like retirement plans.
In states like California, Oregon, Maryland, Illinois and Connecticut, private sector workers are eligible for secure choice plans automatically, and they can also have their plan payments deducted automatically from their paychecks.
The problem, secure choice plan critics say, is that private sector companies may decide to drop their own 401(k) plans, to save on the high costs of creating and managing company retirement plans.
Reasons vary for the opposition to state-sponsored retirement plans, but, as usual, cash is one culprit.
Data shows that costs to provide company sponsored 401(k) plans can add up, especially for small businesses. According to the U.S. Bureau of Labor Statistics, in June 2016, average costs in private industry for retirement and savings benefits stood at $1.27 per hour worked, or 3.9% of total compensation. If companies think they can save some cash by farming out the retirement plan to states like California, they may be tempted to do so, talent recruitment tool or no recruitment tool.
"The Employee Retirement Income Security Act of 1974 (ERISA) has been a key component of our retirement system's legal framework for over 40 years, regulating important aspects of employer-provided plans at the federal level," stated the U.S. Chamber of Commerce, in a December, 2016 memorandum. "The Chamber is concerned that state actions establishing and regulating private employer-provided plans will create unnecessary complexity in the system. Layering a state-imposed retirement regime on top of ERISA will cause unnecessary burdens, particularly for small businesses, and it could have a stifling effect on the very purpose of ERISA."
"Even a small employer can have operations, employees, or facilities in more than one state and, therefore, could have difficulty complying with differing state requirements," the memorandum adds. "The purpose of ERISA's preemption provision was to avoid this very situation. It could also create unfair competition between the government and the private sector. Therefore, the Chamber supports ERISA preempting all state laws that relate to employee benefit plans covered by ERISA."
Another issue with state-sponsored retirement plans, and one that could ensnare financial advisors who work with lower-income clients, are state public assistance programs. In a word, workers who become eligible for specific IRA-like triggers with secure choice plans, may lose that eligibility if they received government subsidies like welfare, food stamps, health care, and other government assistance programs. Such subsidies could push private sector workers past asset and income limits linked to state-sponsored retirement plans, and thus disqualify them for much-needed retirement help.
For their part, business owners say that lower-income workers don't always have the best access to solid, dependable company retirement plans. "We have a looming retirement crisis in America-a severely overburdened Social Security, a bankrupted pension system, and a lack of coverage for one-half of the American workforce," states Chad Parks, founder and CEO of Ubiquity, a retirement plan product and services firm based in San Francisco. "The states that are engaging in a public option, believe that private solutions do not exist for, for example, the small business with 2-20 employees. Larger firms, as well as Wall Street, have ignored this audience, as it does not represent the kind of revenue they get from large asset plans."
Parks says that secure choice or auto-IRA plans are a "noble" idea. "States are legitimately trying to do something that will help people who lack access to a retirement savings plan at work," he says. "Data indicates that when given the opportunity, the majority of employees will take advantage, delivering recognizable outcomes that achieve a dignified retirement where you don't have to choose between, for example, health care or a roof over your head."
On the negative side of the ledger, Parks says state-sponsored retirement plans really do face an uphill climb, in several respects.
"Some states are creating these programs from scratch, running it through an existing government entity such as the Employment Development Department, for example," he notes. There's a quality issue there, he adds. "Do you really want to get your retirement plan from the DMV?" he asks.
Parks also notes plan costs are high - "as much as 100 basis points with some state-mandated plans, when the actual cost should be closer to 25 basis points," he states.
"Additionally, the cost burden is not shared employer and employee - rather the entire cost is on the employee, which will cause a negative effect through savings erosion for the people who have been placed in this program."
"States should not be afraid to put some of that financial burden on the employer," he adds. "The cost is negligible and is a tax write-off.
Investments are also limited, with most employee retirement assets steered into treasury bills or mutual funds. "That's great for a less savvy investor who is just getting started, however, for those that have experience, this is going to be lackluster at best," Park says.
The problems linked to state-mandated retirement plans, while not insurmountable, need to be addressed. Certainly, lower income Americans do need a retirement investment vehicle they can trust, and largely, they're not getting that from Wall Street.
Yet while states like California and Maryland that do offer such plans are a logical "first step" for low-income retirement savers, secure choice and auto-IRA plans really won't take off until some of those logistical hurdles (especially the subsidy and small business "opt out" scenarios) are removed.
If and when that happens, U.S. career professionals on the lower end of the income spectrum may finally have that retirement plan they can trust - but that day seems like a long way off, until state policy makers get their act together, and improve on mandated retirement plans.