The Case for State-Run 401(k) Plans

High-profile industry pundit Robert Pozen advocates for state-run 401(k)s.
High-profile industry pundit Robert Pozen advocates for state-run 401(k)s.

Bob Pozen hearts state-run 401(k) plans. The high-profile author, MIT instructor and former chairman of MFS Investment Management took to economic website RealClearMarkets.com on Tuesday to advocate for the public sector initiative. In short, if Congress won’t do it, the states are the next best thing.

“The U.S. is facing a retirement crisis,” Pozen dramatically began. “About one third of Americans have no retirement savings, and most don’t have enough savings to retire comfortably. One main cause of this financial shortfall: more than 60 million American workers have no retirement plan offered to them by their employer.”

Pozen, who was a member of President Bush’s Social Security Task Force, then launched into a description of the recent proposal from the U.S. Department of Labor (DOL) intended to encourage more employers to offer a retirement plan to their workers.

“Specifically, the DOL proposed to exempt from ERISA, the federal pension law, state-sponsored plans for individual retirement accounts (IRAs). These state plans would require employers that do not already offer any retirement program to forward to the plan a state-specified percentage of their workers’ salaries. These monies would be invested as retirement savings, unless workers opted out of this state-sponsored plan.”

After noting some of the advantages and disadvantages of the ERISA-exempt state run idea, he added:

“In short, it would be optimal for Congress to adopt an Automatic IRA as a defined contribution plan with uniform federal rules. If that is not politically feasible, the DOL should try to minimize conflicts among state IRA plans and to constrain the role of state governments in investing worker contributions.

“Most importantly, the ERISA exemption of DOL should include conditions requiring states to hire qualified financial professionals to invest worker contributions in diversified funds, independently managed with appropriate asset allocations. Those conditions would be designed to assure that state IRA plans would advance the best interests of participating workers.”

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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