Nearly three-quarters of the states have either implemented, passed legislation to implement or are considering legislation to implement state-run retirement plans. Companies over a certain size (and this can be as few as one employee depending on the state) must either offer a retirement plan of their own or automatically enroll their employees in the state-run plan. Employees can choose to opt out of the program at any time. The specifics for each state are different, which is confusing but understandable. Generally, these plans are automatic enrollment Roth IRA programs where the state either picks or hires someone to pick the investment options. They are simple and clean and meet their objective of offering everyone a workplace savings opportunity.
Critics respond to the plans
There is no shortage of news coverage deriding state-run plans. Many critics take exception to the lower contribution limits compared to an employer-sponsored, qualified retirement plan, the lack of access to financial advice, the lack of employer contributions, and generally, government involvement in private business. Some have even criticized the potential for people to lose means-tested government benefits if they accumulate too much in a state-run plan due to being automatically enrolled in the plan. We view these criticisms to be misguided at best.
Filling a gap
While there is no doubt that state-run plans are a poor substitute for employer-sponsored, qualified retirement plans, the simple fact is that many employers simply will not sponsor a plan for their employees.
Can we blame them? Why would you subject yourself to the liability, regulations that even the largest companies with the best experts assisting them can’t fully comply with, litigation risk (low but existent) – all while adding material expense per participant? The retirement and financial services industries have simply done a poor job of offering an affordable retirement solution to the smallest employers and the Department of Labor and the Internal Revenue Service haven’t helped with the cost of the regulatory burden that gets passed on to the employer or employee. By the time the recordkeeper, TPA and investment advisor get paid, you are looking at real expense. The states are trying to solve this product gap. Sure, there now is a tax credit to help offset start-up expenses for new plans, but it only lasts three years. Who is going to pay for year four? Pooled Employer Plans may be the solution as they gain traction and scale, but there is also no shortage of detractors towards PEPs in the retirement space. All we hear about is the coverage gap but then deride solutions working to narrow it. One could be forgiven for thinking that perhaps the criticism is borne from protectionism. Is this founded?
“While there is no doubt that state-run plans are a poor substitute for employer-sponsored, qualified retirement plans, the simple fact is that many employers simply will not sponsor a plan for their employees.”
State-run plans are not perfect, but as Voltaire said, "Perfect is the enemy of good." They are better than nothing and a step forward to solving the coverage gap for smaller employers. If we as an industry do not like them, then let’s come up with an affordable option that is better.
All opinions expressed here are the judgment of the author and subject to change. This article is for informational purposes only and is not a recommendation. There is no guarantee that these statements, opinions or forecasts will prove to be correct.