State lawmakers continue to consider legislation that would establish state-run retirement plans for private sector workers and require certain employers to auto-enroll their employees in these plans. These plans would directly compete with existing private market programs that already offer consumers a robust variety of retirement options.
In recent years both media and policymaker attention has focused on the fact that a large percentage of workers are not saving nearly enough for retirement. Due to the belief that there exist significant gaps in access to retirement savings plans, many states have considered legislation that would implement state-run IRA-type retirement plans designed to make retirement savings options available to workers at small and medium-sized companies. Under these proposals, employers who do not already offer their employees a work-based retirement plan would be required to participate in the state-run program. The employees would be automatically enrolled in the state-run plan, but would be able to opt-out of participating in the program.
NAIFA understands the importance of retirement security and acknowledges that many Americans are not saving enough for retirement. However, NAIFA does not believe that a state-run plan that competes with private market plans is the answer. Availability and access to retirement savings options are not the problem. There already exists a strong, vibrant private-sector retirement plan market that offers diverse, affordable options to individuals and employers. If a retirement plan is not offered at work, employees have ready access to low-cost IRAs through local financial advisors and financial institutions. There simply is no need for a state program to compete with the private sector.
In addition, the existence of a state-run retirement plan could result in employers with strong existing 401k and other types of plans dropping them and allowing the state-run program to take the place of the existing plan. This would lead to more plans with lower contribution limits and a loss of matching contributions by employers.
There are many reasons - other than a lack of access to retirement plans - for why people aren’t saving enough for retirement. These reasons include the fact that many people simply do not have enough dollars left after paying their monthly bills to also save for retirement, as well as a lack of understanding of how important it is to put money away for the future. States should analyze why people aren’t saving enough before enacting solutions.
NAIFA believes that states would be better served by using scarce state resources for education and outreach efforts designed to educate their citizens about the importance of saving for retirement, rather than implementing their own costly state-run plans. NAIFA supports the voluntary, private market-oriented legislation enacted in Washington State and New Jersey, as discussed below.
Over 30 states have considered legislation that would establish a state-run retirement plan. To date, California, Illinois, Oregon, Connecticut, Maryland and Massachusetts are the only states that have enacted legislation establishing a state-run plan program. The California, Illinois, Connecticut, Maryland and Oregon programs will automatically enroll most employees in the state in a state-sponsored retirement account if their employer does not already offer a retirement plan option; the Massachusetts plan is narrowly limited to non-profit organizations with fewer than 20 employees. Due to numerous legal and cost concerns, none of these plans has been implemented or become operational. No other state has enacted legislation establishing a state run retirement plan. Washington State and New Jersey have enacted legislation which sets up voluntary retirement marketplaces designed to bring together employers and private market plan providers.
Finally, in 2016 the U.S. Department of Labor adopted a rule that would facilitate the enactment of state-run retirement plan legislation by exempting such plans from coverage under ERISA. In early 2017, however, the Congress utilized the Congressional Review Act to override the DOL action and nullify this rule. As a result, many open questions exist as to whether and to what extent these state-run plans will be subject to duties, responsibilities and potential liability under the federal ERISA law.