By Marin E. Gibson
Americans are not saving enough for retirement. As a country, we all agree that we can and should do more to encourage savings and increase education on opportunities to invest. Fortunately, there are many options readily available, which is why it is surprising that some states are exploring the creation of their own costly and burdensome retirement savings plans for private sector workers.
These state-run plans are based on the misguided notion that private sector retirement plans are inaccessible to most Americans. The reality is that over 75% of full-time American workers have access to retirement plans through their workplace. For those that do not have an employer-sponsored plan, IRAs and individual annuities - as well as the new federal MyRA program - are available to anyone who wants them, and can be opened for little to no money.
Moreover, people choose not to save for a variety of reasons other than accessibility, including competing financial demands. Establishing state-run plans won't change this fact - but better education about the importance of saving might.
Additionally, state-run plans offer few assurances to savers. Not only would these untested plans not have the same level of information on which to base investment decisions as existing private sector plans, but some states are actively trying to remove important investor protections. As a cost-saving measure, such states are seeking exemptions from the Employee Retirement Income Security Act of 1974 (ERISA) - an important federal law which protects retirement savings.
ERISA provides crucial protections to savers - including protections related to disability and death, spouses and family members, and job changes (including moving jobs between states). Ensuring the security of an employee's retirement savings should never depend on 50 different sets of rules (especially when a single effective framework is already in place).
The truth is that saving for retirement needn't be expensive or complicated. Financial advice is both plentiful and readily available from a variety of sources, and the private sector offers many options through financial advisors, banks, insurance agents, and credit unions. There are options for everyone from the seasoned investor to the hard-working family or the recent college graduate just starting to build his/her nest egg, and the vast majority of these options are also easily accessible online. States should consider working with the industry to improve awareness of these existing options, rather than complicate an already effective system with added risks, costs, and undue burdens for small businesses and taxpayers.
Furthermore, after a rigorous development process, the federal government recently released the MyRA - a federally-backed savings product that specifically helps those that state run retirement plans are intended to benefit: employees without workplace retirement plans. SIFMA supports this government alternative. MyRA is a no cost, no fees payroll deduction program carefully crafted by the U.S. Department of the Treasury through a collaborative process. It is portable, has Roth IRA tax advantages, is backed by the U.S. government, and is a simple, safe, and affordable way for businesses and individuals to save for retirement.
Since 2010, 25 states have considered legislation to establish a state-run retirement plan for private sector workers. However, when states such as Indiana and Washington have looked at this in the past, they have decided not to move forward, due to the costs and compliance burdens. Additionally, with today's mobile workforce, state-run plans can create portability issues for private sector workers, who may have trouble moving their retirement plan should they change jobs and move to another part of the country.
Before jumping into a state-run program, states should not only explore all the costs and benefits of running a plan, but also look to other states for workable alternatives. In May 2015, Washington State enacted the "Washington Small Business Retirement Marketplace," a voluntary program that helps fill the savings gap by connecting small businesses with private sector retirement plans that meet certain low-cost criteria. The law also requires the state to provide financial literacy education and outreach. Because the program efficiently harnesses the robust private sector (as well as the federal MyRA program), every plan in the marketplace provides full investor protections, and the program's cost is a fraction of the proposed state-run plans.
There is no question that Americans should be saving more for their future, but state-run retirement plans are not the solution.
Obstacles like slow wage growth and high levels of debt make it hard for families to save for the future. Further, states have demonstrable difficulty with running retirement programs, with at least 27 states currently facing pension shortfalls over $10 billion. A new program won't change the realities facing families, but it could add unnecessary burdens to taxpayers.
To have a real impact, state officials should support enhanced education, outreach efforts, tax incentives and other initiatives, like MyRA or the Washington State plan. The government and the private sector must work together to advance public policies that make it easier to save. In doing so, families will be able to put away more of their paychecks, plan responsibly, and start building a more sound and secure financial future.
State Run Retirement Plan Proposals
Marin E. Gibson
Managing Director, Associate General Counsel
State Government Relations