State-mandated automatic IRAs are making their way through state legislatures but they are being opposed by trade associations because they could compete with the private sector and reduce consumer choice.
“We just do not believe that setting up an entire system through the state is the best way to accomplish the goal of increasing the number of people saving for retirement,” said Lisa Bleier, managing director and associate general counsel with SIFMA in Washington, D.C.
Illinois was the first to enact auto-IRA laws two years ago followed by Oregon and Washington state last year.
“We worked with the State of Washington and now New Jersey on a marketplace concept where the idea is to match up small businesses with plan options that are out there today,” Bleier said.
The intent is to deduct retirement contributions from wages of workers employed by a small business and to deposit the savings directly into an IRA, which offers tax deferred growth.
“All of the options within the Washington state plan are risk-compliant,” Bleier said. “They are not subject to ERISA.”
Connecticut and Maryland enacted auto-IRA laws this year. California's proposed plan may be finalized when its legislative session ends in August and Vermont, Iowa, Colorado, Georgia, Louisiana and Hawaii are considering bills while in New York, the Business Council of New York filed a comment in opposition to an auto-IRA bill that was presented to the Assembly during the current session.
“We oppose the states that take out the presence of a financial advisor and states that would contract with only one investment management company where there’s no financial advisor to make recommendations and provide no space for financial advisors to become part of the auto IRA plan,” said Chris Paulitz, senior vice president of membership and marketing with the Financial Services Institute (FSI) in Washington, D.C.
In some states, the government is positioned to play the role of financial advisor within state administered auto-IRA programs and it’s not just trade associations that are concerned. Financial advisors question what a state run automatic-IRA retirement plan might turn into in the long run.
“This is about the government moving step by step toward requiring people to put their money into government treasuries,” said Keith E. Schnelle, a financial advisor in Austin. “That’s until the U.S. dollar goes in the toilet and all those guaranteed treasuries do the same.”
According to AARP, an estimated 55 million Americans have no employer-sponsored retirement plan to supplement Social Security.
“There is not just one solution for everyone,” said Nandita Das, a certified financial planner in Dover, Del., and associate professor of finance with Delaware State University. “Retirement planning cannot be standardized. Financial planning is too much of a personal thing. It has to be tailored to the individual and each business because two small businesses will have totally different needs.”
There is also the concern that a conflict of interest will arise if only one financial firm is appointed to manage investments.
“In some states, the state run retirement program is structured with a board that’s set up to select the financial services firm that will provide the investment options that workers can choose from and this may or may not include a financial advisor,” said David Bellaire, executive vice president and general counsel with FSI. “The appointed financial services firm may be a manufacturer of a particular set of investment products offering a cookie cutter approach to retirement investing that ignores specific investor needs as it tries to appeal to the masses.”
Instead, trade associations are advocating for an abundance of choice and customization of retirement planning within state-administered auto-IRAs much like the state of Washington’s structure.
“We want a competitive marketplace,” Bellaire said, “rather than legislators appointing one financial services firm to manage the state’s entire program.”
Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at email@example.com.
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