More Governments Get Into The Retirement Plan Act

By Linda Koco

For the most part, the idea of establishing a municipal-level retirement savings programs for workers in small businesses who have no access to a workplace savings plan has been only that — an idea. But a proposal along those lines is already under study in New York City.

The city council had a hearing on the proposal in late June. And a study group has been meeting to develop potential recommendations.

This is happening at a time when at least five states have passed laws creating state-level (not city-level) retirement saving programs for workers at small firms, and when seven to 10 other states are considering similar measures.

It’s also happening as the federal “starter” retirement savings program created by President Barack Obama early last year is running its pilot. Called myRA (for my Retirement Account), that program also aims to provide a retirement savings option for workers who have no access to a workplace plan. (Details on myRA signups are sketchy, but a June newsletter from the Department of Treasury Secretary did recognize Glen's Garden Market, a Washington, D.C., grocer, as an early participant.)

If all or most of these government-created programs pop, retirement specialists could find themselves boning up on a maze of plans that aim to be simple for workers to use and employers to facilitate, but that also may conflict, overlap or complicate. Much will depend on the actual designs and the amount of involvement that government and private sector providers have in the programs.

The New York City proposal

In late June, a committee of New York’s city council held a hearing on a proposal (Int. No. 692-A) to establish a “retirement security review board.” This board would be tasked with developing recommendations on ways to establish a retirement security program for private sector workers in the city of New York (not the state).

Introduced in February by Letitia James, New York City’s public advocate, the proposal is being positioned as a way to address the widespread lack of access to workplace retirement plans that researchers said they’ve uncovered in the city.

The proposed measure is still pending, but New York City Comptroller Scott Stringer already has appointed a Retirement Security Study Group to assess the feasibility of establishing a retirement security program and fund for the city’s private sector workers. The goal is for the group to develop three “innovative and affordable” retirement savings options by fall 2015.

If a plan is enacted after further study, New York would be “the first city in the nation to advance comprehensive retirement security solutions at the local level, in consultation with leading national experts,” Stringer said in a press release.

An estimated 1.8 million working New Yorkers do not have access to an employer-sponsored retirement plan, according to a trends study cited in a committee report of the city’s Human Services Division. The National Conference on Public Employee Retirement Systems (NCPERS), a Washington-based public sector pension advocate, puts the number even higher; it found that 3.9 million in the city’s private sector lack access to an employer-sponsored retirement savings program, said Executive Director and Counsel Hank Kim.

Potential impact

The National Association of Insurance and Financial Advisors (NAIFA), has been assessing the state-level initiatives.

NAIFA’s view is that there is no need for states to set up their own plans, said NAIFA President Juli McNeely. The private retirement plan market “already offers a wide variety of comprehensive retirement planning solutions for persons in all walks of life,” she said in a press release.

In a posting at the NAIFA website, the trade group said it understands the importance of retirement security and acknowledges that many persons are not saving enough for retirement. However, it said it believes that “competition by a state-run retirement plan is not the answer.”

Then, there is the matter of plan design. A number of the initiatives create a state-run retirement plan in which employees can participate if their small business employer does not currently offer a plan. Typically, these initiatives require the employers to participate.

However, one design — from Washington state, just signed into law in May — is more to NAIFA’s liking. It establishes a retirement plan marketplace, not a state-run plan, and participation is voluntary for both employers and employees. It also allows for the participation of all private sector financial services firms that meet the law’s conditions, and “expressly calls” for the marketplace to include life insurance products designed for retirement purposes, NAIFA said.

NAIFA believes this “will bring greater benefits to employers and employees than efforts being pursued in other states,” McNeely said. It will also “play a crucial role in helping to educate consumers about the need to save for retirement.”

Plan design varies

State plans differ in several ways. For instance, some do not stipulate that the employer be “small,” and so far Washington state has the only law that takes a marketplace approach. There are many other differences as well. Here are just a few highlights from the four other states that have passed laws:

The Oregon law, signed on June, creates the Oregon Retirement Savings Board in the office of the state treasurer. This board has power to establish, implement and maintain a defined contribution plan, but it allows use of private-sector partnerships to administer and invest contributions.
The Illinois law, signed in January, creates the Illinois Secure Choice Savings Program, as a state-run initiative. It mandates participation of specified types of private sector small businesses.
The Massachusetts law, passed in 2012, is for small nonprofits (though the state has some other proposals, for businesses, in the hopper now).
The California law, also from 2012, is applicable to employees of most businesses having no current plan if the firms have five or more workers.

Variety in design is a surefire sign that innovation is occurring. But the jury is still out on outcome. None of the five plans is up and running, as some must do studies and meet other requirements.

Also unknown is what the response of workers will be. Industry research on 401(k) plans indicates that many workers who have access to the plans do participate. For instance, a 2014 study by LIMRA Secure Retirement Institute found that 77 percent of workers at firms with fewer than 100 employees did participate in their 401(k)s.

That may or may not predict the amount of participation in state-level plans. This is because the state plans will differ from 401(k)s, will be new and unknown, and will be offered to workers who may have notably different needs, wants and demographics. However, government-plan backers think some workers will sign on.

As for whether a city-level plan, such as in the New York City proposal, might take hold, industry commentary has been sketchy so far. In Oregon, however, that won’t even be an option. In the law creating the Oregon plan, Section 9 has a preemption which specifically states that a local government “may not establish or offer any retirement plan for persons not employed by a public body.”

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.