Illinois earlier this month did something no other state has done: it signed into law an automatic retirement savings program to help residents who have no such plan at work. Other states are considering similar programs. Jon Vogler, who works as a senior analyst on retirement research at Invesco Consulting, sees plenty of challenges ahead for these programs. Before starting work at Invesco in 2008, he spent more than 25 years in compliance, research and underwriting of retirement services. Here, Vogler addresses some of the key issues facing state retirement programs for BenefitsPro.com’s Advisor Corner.
1. What are some of the biggest problems that we might see as states move forward in setting up their own retirement systems?
State-run retirement programs for private-sector employees would have limited investor choice for plan participants. There could be substantial expenses for states and taxpayers in start-up and ongoing administrative and compliance costs. State-run retirement programs could undermine incentives for small businesses that do not currently offer employer-sponsored plans to establish their own plans in the future. In addition, some small businesses that do have their own plans might be incented to drop them and let the state cover their employees.
Plan participants would likely not have the same access to advice services as they do through employer-sponsored plans.
2. What kind of threats, if any, do these efforts pose to the protections afforded under the Employee Retirement Income Security Act of 1974?
While the proposals for state-run retirement programs say that their plans are not designed to be subject to ERISA, it is doubtful at this time that the federal government will grant an exemption from these rules. The Department of Labor indicated at a hearing of the Oregon task force on retirement savings in June 2014 that a state-run retirement plan for private-sector workers could create significant liability for the state and its private employers.
3. Given the new Republican majority in the House and Senate, should we expect the federal government to take the lead back from the states to address the retirement crisis?
Retirement-related legislation generally hasn’t been much of a partisan issue on the federal level. Sen. Orrin Hatch, R-Utah, who will take over as chairman of the Senate Finance Committee, has already promised to push forward his Secure Annuities for Employees Retirement Act, which has garnered bipartisan support. In addition to making substantial changes to the public retirement system for state and local government employees, the bill would expand coverage and simplify the operation of the private retirement system. Among other items, the proposed SAFE Act includes:
A “starter” 401(k) plan for small private-sector employers, with a maximum salary deferral of $8,000 (plus catch-ups), no employer contributions, mandatory auto enrollment and no Form 5500 requirement.
Expansion of multiple-employer plans.
E-delivery default for all required disclosures.
A “secure deferral arrangement”— a 401(k) safe harbor alternative – with auto enrollment between 6% and 10%, auto escalation, matching contributions (up to a maximum of 3.4%) for non-highly compensated employees and an exemption from top-heavy and nondiscrimination testing.
4. Do you foresee retirement becoming an issue in the 2016 presidential race?
As the baby boomers age, retirement readiness and opportunities for lifetime income will continue to be hot topics. Public- vs. private-sector solutions will be under the microscope. Ways to improve the long-term solvency of the Social Security system and the relative merits of expanding or trimming benefits will be debated.
5. Which state, aside from Illinois, is now furthest along in the efforts?