By Cyril Tuohy
Financial advisors appear split over state initiatives to offer retirement plans to millions of Americans who don’t have access to them.
On one side, advisors seem to think the plans make sense. That’s because many workplaces still don’t offer retirement plans, so the initiatives mean that workers can set aside money in a retirement plan, no matter where they work.
By creating plans unrelated to the workplace, more people will have access to retirement plan, said Ric Edelman in a recent USA Today article. Why should the ability to save for retirement on a tax-deferred basis be contingent on where people work?
The counterargument is that there are already employer-sponsored retirement options as well as many individual retirement answers, not the least of which was recently put forth by President Barack Obama last year.
Other advisors such as Joe Ready, head of Wells Fargo Institutional Retirement, believes minor modifications in the 401(k) system can make the program accessible to even more people than it is today.
As some public retirement policy experts have pointed out, do we need more retirement account options that can’t be solved by what we already have in place?
Also a good question.
However advisors come down on the issue of state-based retirement plans for the private sector, often referred to as “Secure Choice” legislation, several initiatives introduced in state legislatures over the past two years appear to have either stalled or faced delays.
The Edelman-Ready divide reflects a similar divide among state lawmakers.
Life insurers say the need for better retirement preparedness isn’t in doubt, but the main reason people aren’t saving isn’t due to a lack of access to savings opportunities.
People aren’t saving for retirement because they have too many other priorities. They don’t feel very secure about their jobs, they’ve incurred too much debt, and administrative complexities are holding back small businesses from offering 401(k) plans.
On the other side, labor unions and AARP say the state-based plans offer workers a convenient payroll-based retirement savings vehicle.
Every dollar earning interest in a private retirement plan means one less dollar the state has to spend to subsidize older retirees — through programs like Medicaid — when the day comes that those retirees need help because they’ve exhausted their private retirement savings.
AARP statistics show that the percentage of private wage and salary workers ages 18 to 64 whose employers do not offer a retirement plans range from more than 63 percent in New Mexico to 39 percent in North Dakota.
In Illinois, the Secure Choice Savings Program, which gives all workers in that state access to an employer-based, portable, individual retirement savings account funded through payroll deductions of 3 percent, was signed into law in January. But Illinois is the exception as state involvement in employer-sponsored retirement plans hasn’t been popular elsewhere.
According to the website U.S. Retirement Facts, state-run Secure Choice retirement plan initiatives for private-sector employers failed to pass or were rejected outright over the past two years in Arizona, Colorado, Indiana, Louisiana, Maine, Maryland, Minnesota, Ohio, Vermont, Washington, West Virginia and Wisconsin.
In 2013, similar legislation failed in Oregon and Connecticut.
Instead, state lawmakers, including those in California, have “downgraded” the initiatives and preferred to allocate funds to create retirement boards, task forces, commissions and study panels charged with conducting feasibility studies.
Legal analysts say the Employee Retirement Income Security Act (ERISA) will apply, imposing a fiduciary liability for employers and states — unless the federal government issues states an exemption from the rules.
In Connecticut, Gov. Dannel Malloy last year signed into law legislation to invest $400,000 to create the Connecticut Retirement Security Board.
The board has been charged with conducting a feasibility study to implement a retirement plan to cover more than 750,000 private-sector workers in Connecticut that are not participating in employer-based retirement savings plans.
In Minnesota, about 1 million workers are not setting aside retirement funds through their workplace, largely because they don’t have access to one, according to a fact sheet supplied by the Minnesota State Council of the Service Employees International Union.
There, too, a Secure Choice initiative is under study.
In North Dakota, a bill to amend the North Dakota Century Code would allocate $100,000 to design and implement a “state-facilitated retirement program” for private sector employers with fewer than 100 workers.
No doubt, the scramble is on to find ways to offer work-based plans without raising the cost to small employers in the wake of the demise of corporate defined benefit programs. But even in traditionally generous states — Vermont, Minnesota, Wisconsin and Oregon — state-based employer-sponsored retirement plans have had trouble gaining a foothold.
The Illinois program requires employees to opt out if they don’t want to participate.
Only half of workers at employers with less than 100 employees even have access to a retirement plan and an estimated 2.5 million workers in Illinois will benefit from the Secure Choice Savings Program, which begins in 2017.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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