The recordkeeper that is winning the business of state-sponsored IRA retirement plans says early indicators are showing better-than-expected enrollment.

Ascensus, which administers more than 54,000 employer-sponsored retirement plans, is the service provider to programs in Oregon, California, and Illinois.

In Oregon, which was the first state to roll out an automatic enrollment IRA program in 2017, participation rates are exceeding expectations, says Barb Van Zomeren, senior vice president at Ascensus.

“Oregon has been a great success story,” Van Zomeren told BenefitsPRO. “Participation rates have been better than expected, and the program has been received positively by employer groups.”

As of September 1, 2018, 1,160 employers have enrolled in the program, accounting for 39,284 employees, or 73 percent of workers eligible to participate. On average, monthly contributions to the IRAs is about $100, making for an average savings rate of 5.13 percent. Total assets in the program topped $6.7 million.

Participants pay 1.05 percent in annual fees—85 basis points goes to Ascensus, 5 basis points pays for the state's cost, and the rest goes to fund managers, according to analysis from Pew Charitable Trusts.

The program's phased rollout began by requiring businesses with more than 100 employees that don't sponsor a workplace retirement plan to register with the Oregon Retirement Savings Board. In May, employers with 50 to 99 employees were phased in, and on December 15, employers with 20 to 49 workers will be required to enroll workers. By May 2020, all employers that don't sponsor a retirement plan will be required to participate.

Employers are given a 30 to 45 day period in which the program is communicated to workers, explained Van Zomeren. After that, workers are automatically enrolled at 5 percent of their salary. The program automatically escalates savings rates at 1 percent annually, up to a deferral cap of 10 percent. Deferrals are made on an after-tax basis. Employers are not allowed to contribute.

Participants can opt out after being automatically enrolled. Van Zomeren said only 4 percent of participants have so far.

“That statistic reflects that participants are paying attention during the enrollment process,” she said.

“Limited” evidence of existing sponsors moving workers to state plan

Oregon moved ahead with its plan after an Obama-era safe harbor for state-administered IRAs was narrowly scuttled in the U.S. Senate in 2017.

Under the safe harbor, employers in state plans would not be subject to fiduciary obligations and liabilities under the Employee Retirement Income Security Act. When Congress rolled back the safe harbor under the Congressional Review Act, some speculated it would prove to be the death knell of state-administered retirement plans for the private sector. California and Illinois have also moved ahead with its programs.

The question of employers' fiduciary liability under state plans, and ERISA's preemptive provision over state law, is being challenged in federal court. In June, the Howard Jarvis Taxpayers Association, a California-based advocacy for taxpayer rights, sued CalSavers. The suit alleges California's IRA program violates the Supremacy Clause of the U.S. Constitution because ERISA preempts California's law that legislated its program into existence.

States have explored addressing the gap in access to workplace retirement plans for more than a decade. A 1975 safe harbor that remains on the books allows employers to enroll workers in IRAs so long as participation is completely voluntary. At issue in the CalSavers lawsuit is whether automatic enrollment, with an opt-out feature, satisfies the definition of completely voluntary.

Critics of state-sponsored IRAs argue the policy puts private-sector retirement and investor providers at a disadvantage. All employers that sponsor a retirement plan are fiduciaries under ERISA. But Oregon and the other states moving forward have explicitly or implicitly said employers in their plans are not fiduciaries.

By allowing employers to participate in state IRAs without bearing fiduciary liability, some argue, existing sponsors will have an incentive to drop their retirement plans and move workers to state-administered platforms.

In Oregon, Ascensus has seen “limited evidence” of current sponsors moving to the state's platform, said Van Zomeren.

“The target niche for these plans is for employers that have no plan to begin with—for whatever reason, they haven't adopted a plan,” she said.

More than a threat to existing private sector plans, Van Zomeren thinks state-administered plans could actually be a catalyst for wider adoption of private sector plans.

“By having employers adopt a very simple IRA plan, and have the administration provided for them, they start to see the benefits of providing a retirement plan,” said Van Zomeren.

“As employers participate in state programs, and as they grow in size, they may graduate to a 401(k) or SIMPLE IRA that has higher contribution limits or a match. We're hoping this will serve as a stepping stone,” she added.

MEPs not seen as a threat to state plans

The recent groundswell of momentum behind Open Multiple Employer Plans, which allow non-aligned small employers to pool participants and assets under one 401(k) plan, won't staunch states' efforts to administer IRAs, thinks Van Zomeren.

A recent executive order from President Trump instructs the Labor Department to develop regulation to encourage wider adoption of MEPs. A bill that passed out of the House Ways and Means Committee last week would do the same.

Van Zomeren sees synergies between Open MEPs and state retirement plans.

“Both can help close the access gap, but I'm not sure either alone is the answer,” she said.

Access to a MEP could move an employer that has been considering adopting a plan over the edge. But the act would be voluntary, and require administrative tasks and new costs to employers, and potentially pressure to offer a match.

“Some employers won't be ready for that,” said Van Zomeren.

Why Ascensus?

Oregon, California, and Illinois—the three states that have rolled out or scheduled a roll out of state administered IRAs—have all chosen Ascensus as the service provider.

Van Zomeren points to Ascensus' 40 years as an IRA provider, and the more-than 4 million 529 savings accounts—which are sponsored by states—it administers as ballast for its viability servicing state administered IRAs. She also says Ascensus' core values align with the public-interest imperative behind state retirement plans.

“That expertise allowed us to have a plan to bring to the states,” she said.

The firm's government savings unit, which runs its 529 plans, and its retirement division, teamed to build Oregon's platform.

Ascensus took a proactive approach in Oregon, meeting with employer groups during the program's pilot phase.

“That outreach, and the feedback we're getting from employers in each state, is helping us make our platform as user friendly as possible,” she said.

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Preferred recordkeeper to state IRA plans says enrollment in Oregon better than expected

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