A new policy paper published by Morningstar calls for the creation of a federal retirement savings mandate for workers without access to employer-provided defined contribution plans.
While not a novel idea, it is the first time that Morningstar has officially come out in support of requiring an auto-IRA savings option.
Comparable to several initiatives underway at the state level, Morningstar is not proposing an employer contribution requirement. And workers would retain the ability to opt-out of the IRAs.
In July, the Oregon Saves program was officially rolled out, and as of November 15, employers with more than 100 employees that don’t sponsor a plan are required to auto-enroll workers in a state-administered Roth IRA. All employers will be required to either offer a private savings plan, or enroll workers in the Oregon Saves program, by the end of 2020.
Oregon’s initiative–and those in California, Illinois, Connecticut, and Maryland–are moving forward despite the Trump administration’s repeal of an Obama-era safe harbor that would have made it easier for states to launch auto-IRA savings programs.
Oregon’s program will inform the viability of a nation-wide policy, says Aron Szapiro, director of policy research at Morningstar and a co-author of the firm’s new paper .
“It will be clear pretty quickly how well the program works,” Szapiro told BenefitsPRO. “The most important metric of success is whether the program increases the number of people saving for retirement. We think it will.”
By the end of the year, Szapiro says data should reveal if workers are opting out of Oregon’s program at high rates, an outcome he doesn’t expect.
And more will be understood about participating employers’ experiences and whether enrolling workers and amending payroll systems is proving to be unduly burdensome.
In Oregon, enrolled workers will have 5 percent of their earnings automatically deducted, with annual automatic increases of 1 percent, unless workers choose to opt-out of the program. Deferrals will be invested in target-date funds.
More time will be needed to assess whether employees maintain savings rates and enrollment, and the program’s impact on savers’ ability to address other obligations, like paying down credit card and student loan debt, says Szapiro.
Small employers’ disadvantage
Years of data produced by industry, retirement advocates, and government agencies have documented the vast disparity of access to retirement plans between large and small employers.
About half of employers with less than 50 workers offer retirement plans, compared to 91 percent with more than 500 workers, according to the Bureau of Labor Statistics.
Cost, confusion, and employer fiduciary liability are commonly cited as barriers to plan sponsorship for small employers.
Existing options geared to small employers, like SIMPLE IRAs and Simplified Employee Pensions, have failed to close the access gap between small and large employers, Morningstar argues in its policy paper.
And when small employers do use SIMPLE IRA or SEP plans, workers are subject to considerably higher plan fees. Participants in plans with less than $1 million in assets pay an average annual fee of 142 basis points, compared to 37 basis points in plans with more than $1 billion in assets, according to Morningstar.
Federal policy would not suffocate private market
The Investment Company Institute, which represents the interests of asset managers, has led the lobby against state-mandated auto-IRA programs.
Principal among ICI’s objections is the possibility that state-administered IRAs would deter wider adoption of more generous 401(k) plans, which have considerably higher contribution limits.
In a worst-case scenario, employers that do sponsor 401(k) plans would opt to offload participants in state IRAs, argue critics of state initiatives.
Szapiro questions the merits of that argument.
“As long as the tax treatment of IRAs is worse than the treatment of DC plans, this is a non-issue,” he said.
Small employers with higher-income workers—a law firm, medical group, or engineering firm, for example—offer 401(k) plans as a key benefit.
And other small employers offer 401(k) plans because owners and principals can save higher personal rates at pre-tax levels, notes Szapiro.
So long as default state—or federally administered—auto-IRAs don’t allow for employer contributions, their threat to private-sector offerings is negligible, argues Szapiro.
Paired with open MEPs
Along with a preponderance of retirement advocates and a bipartisan cadre of federal lawmakers, Morningstar is also calling for Congress to pave the way for so-called “open” multiple employer plans, which would improve existing policy and allow small employers to pool assets under a single defined contribution plan.
Pairing a federal auto-IRA mandate with open MEPs would create competitive inroads for plan service providers and asset managers, argues Morningstar.
“It would be easier for industry to sell plans to small businesses, especially if there were open MEP options,” said Szapiro. “There would be huge synergy between auto-IRAs and open MEPS. Industry would benefit from this.”
A provision in the House version of tax reform would set the groundwork for open MEPs, but it is unclear if it will survive budget rules in the Senate. Irrespective, Szapiro expects movement on open MEPs from Congress as early as next year.
A federal IRA program would of course be a much more politically charged proposition.
But the near and mid-term success of state initiatives could move the needle. As Szapiro notes, about one-sixth of the nation’s population is accounted for in the states that are moving forward.
“If those plans work well, I think you will see industry coalesce around a national standard,” he said.
But it will take time—perhaps five years, said Szapiro—for the evidence to bear out.
Moving the policy discussion
Meantime, Congress could move the savings access needle by passing legislation that would further incentivize automatic enrollment in the private plan market.
“That would probably be relatively easy to pass, given that the federal government offers a tax preference for retirement savings and auto-enrollment is by now seen as a best-practice,” said Andrew Biggs, a retirement expert and resident scholar at the American Enterprise Institute.
Biggs has produced studies and data challenging the “retirement crisis” narrative, which is how many policy experts and lawmakers have come to describe the country’s savings landscape.
“A federal mandated (auto-IRA) may have some problems with Republican members of Congress, who could equate it the ACA (Affordable Care Act) mandate,” Biggs said in an email.
“But it’s not the same thing: you’d be mandating that employers offer a plan, not that employees participate. As opposed to state-run plans, I’m okay with that,” he added.
Biggs said Morningstar is advancing a “useful” argument.
“I’m not unfavorable toward the idea (of a federal auto-IRA), especially if offered in conjunction with reforms like open MEP to make small business plans more affordable,” said Biggs.
“We need to move the policy discussion forward on how to broaden access to retirement plans,” he added.