[Editor’s Note: This article has been updated to clarify remarks made by Chad Parks, and fees charged in California’s CalSavers plan. We regret the error.]
It’s been less than two years since the first state-run retirement plans were rolled out as a way to increase the number of workers covered by employer-sponsored retirement plans.
[Related: Most and Least Expensive States for Retirement 2020]
“There are over 1 million small businesses in the country that don’t offer workplace savings plans to their employees; that represents almost half of the workforce,” according to Chad Parks, founder and CEO of Ubiquity Retirement + Savings. “Policymakers are starting to realize that we’re going to have a whole bunch of cohorts of people who are unprepared for their retirement, and that could possibly come back to social service programs and really hit states hard.”
Approximately 30 states have considered legislation, while only 10 have passed mandates regarding state-run retirement plans. The “Big Five,” Parks said—”California, Connecticut, Illinois and, to a lesser degree, Washington and Maryland” have led the way on developing state plans with “some real heat”: implementing incentives as well as penalties for late compliance.
Parks pointed out that the SECURE Act, passed in late 2019, offers a tax credit for 401k plans, but not IRAs.
“Here we’ve got the federal government giving massive tax incentives to people for small businesses to put in 401k plans for their employees,” he said.
He added that with the act’s Open MEP provision, pooled employer plans (PEPs) “will become a popular vehicle under that 401k slice. Some will still find an individual customized plan attractive, but I’m going to say the majority of those who are going to go into the 401(k) solution will go into the PEP/MEP solution.”
Election impact on implementation
Parks hopes that as more states consider plans, “we’ll get some sort of federal guidance as to what this needs to look like.” He compared state-run retirement plans to health care exchanges, where each state has its own offering.
“For the industry to provide solutions, if we’re going to have 50 different flavors [of retirement plans], it’s going to be very hard for us to do so cost-effectively,” he said.
He believes that if the 2020 election gives majorities to the Democrats, “there is a good chance in the next four-year period that you might see some sort of federal guidance” on retirement plans. He pointed to Chairman Richard Neal on the House Ways & Means Committee as a potential leader.
Impact on advisors
Many states use IRAs for their retirement plans to avoid running “foul of any ERISA and 401k laws or regulations and put extra responsibility on the employer,” Parks said.
Looking at California as an example, Parks said that to reduce the financial burden on employers, plan designers worked to make sure “the whole program should not cost more than 100 basis points.”
A “100 basis point plan is rather expensive in today’s marketplace,” he said, so private sector providers that can offer cheaper plans have an advantage
Fees in California’s plan “range from 82-95 bps depending on the investment option,” according to Eric Lawyer, policy director for CalSavers.
In states with competitive fees, private providers may be able to position themselves as an alternative with better customer service.
“Do you want to go get your retirement plan from the DMV?” Parks asked.
He believes inertia will push about a third of employers into state-run plans, while another third will decide to offer an IRA from a private provider to comply with mandates.
“They’re forced to research and pick, so about a third will say, ‘I don’t need all the horsepower of a 401k,” he said.
That leaves a third of employers who are interested in offering 401(k) plans.
Advisors who can’t act as a 3(38) fiduciary to a plan can position themselves as retirement readiness experts, Parks suggested. He encourages advisors to develop virtual plans that allow them to interact with employees in small businesses in the states they serve.
Data on how successful state-run plans have been in increasing retirement preparedness is still early, but Parks said that there is evidence that they have been successful.
[Related: Is There Really a Retirement Crisis?]
Looking at Oregon’s plan as an example, he said, “It was slow to get going, but it is having the pickup rate, and there are savings and contributions going in. So when you measure it from that perspective, it has been successful.”
He was careful to add that positive savings rates are only one measure of success, and critics may still argue that it’s not enough to have a material impact on preparedness.
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
