State lawmakers continue to consider legislation that would establish state-run individual retirement type savings programs 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 and could provide a disincentive for employers to offer.
In recent years both media and policymaker attention has focused on the fact that a many American’s do not have adequate retirement savings and are forced to rely on social programs as they age. As millions of Baby Boomers approach retirement, states are facing down the considerable rising costs. Partially due to the belief that there exist significant gaps in access to retirement savings plans as what is keeping Americans from savings, many states have considered legislation that would implement state-run IRA-type retirement plans. 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. Their employees would be automatically enrolled in the state-run plan but would be able to opt- out of participating in the program.
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. Current litigation against the CalSavers program (Howard Jarvis Taxpayers Association v. California Secure Choice Retirement Savings Program) is ongoing and will be the a precedent setting case in how the courts will handle ERISA preemption of State auto-IRA programs.
NAIFA understands the importance of retirement security and encourages expanding retirement savings options and making it easier for Americans to plan and save for retirement. NAIFA appreciates that states are looking for solutions and we agree this area deserves our attention. However, NAIFA does not believe that a state-run auto-IRA program is the best solution for our members or American workers.
First and foremost, state run mandated retirement savings programs are not addressing the core reasons that American’s are not saving for retirement. There are significant constraints to the savings that auto enrollment savings plans can achieve when provided to workers in industries and firms with low wages, volatile wages, and high turnover.
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.
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.
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 encourages lawmakers to focus on private sector multiple employer plans, which are now easier for employers to adopt as a result of the recently enacted SECURE Act.
Multiple employer plans will have all the benefits, features, and provisions of more traditional single employer retirement plans, but with significant relief to the employers with respect to cost, administrative duties and fiduciary duties. The advantages of these plans over a state-facilitated auto-IRA plan include employer matching of participant contributions, diversity of investment options, less cost to employee-participants, significantly higher annual contribution limits, and the ability (in most plans) to select either or both ROTH or traditional tax treatment of plan assets.
The current private market infrastructure is in place and innovating to meet the challenges of today’s market with the help of lawmakers and regulators.
Nearly 40 states have considered legislation that would establish a state-run retirement plan. To date, California, Connecticut, Colorado, Illinois, Maryland, New Jersey, Oregon and Virginia are the only states that have enacted legislation establishing a state-run plan program. Due to numerous legal and cost concerns, only three of these state plans have been implemented or become operational (CA, OR and IL). These programs are flagging with high employee opt-out rates, low contributions, high employee turnover, and high account withdrawal rates. 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.
The National Association of Insurance and Financial Advisors is the preeminent membership association for the multigenerational community of financial professionals in the United States. NAIFA members subscribe to a strong Code of Ethics and represent a full spectrum of financial services practice specialties. They work with families and businesses to help Americans improve financial literacy and achieve financial security. NAIFA provides producers a national community for advocacy, education and networking along with awards, publications and leadership opportunities to allow NAIFA members to differentiate themselves in the marketplace. NAIFA has 53 state and territorial chapters and 35 large metropolitan local chapters. NAIFA members in every congressional district advocate on behalf of producers and consumers at the state, interstate and federal levels.
Bianca Alonso Weiss
State Government Relations Manager