Maryland's State-Run IRA: Unique, Better, Yet Imperfect

Maryland just announced its retirement savings initiative—MarylandSaves.[i] There are a few similarities, but some favorable differences and improvements when compared to predecessors like OregonSaves, CalSavers, and Illinois Secure Choice.[ii]

Looks similar:

Roth IRA,
Businesses with tax-qualified retirement plans must file with the state to avoid fees/penalties.
Default for first $1,000 invested in capital preservation investment.
Amounts more than $1,000 are invested in a target date fund.
Employer manages payroll deduction process with per payday reporting of details
Automatic enrollment default of 5% of pay, auto escalation of 1% each subsequent January to a maximum of 10% – employers must manage changes to payroll deduction due to escalation. Workers can change deferral rate or opt out

Noteworthy differences:

Applies to employers who do not offer a tax-qualified retirement plan that have been in operation for two calendar years with at least one employee.
Name/program isn’t solely focused on retirement – titled the WorkLife Savings Account.
Consistent with different name, participants can change the investment for that first $1,000.
Annual filing fee of $300 for employers who don’t offer a tax-qualified retirement plan and fail to automatically enroll their workers.
Cash equivalent fund is a Guaranteed Investment Contract with a 1% annual yield minimum.
Unique payout options to be added at some future date:
- “Bridge” payout designed to facilitate deferred commencement of Social Security.
- Monthly installment payouts designed to last a lifetime, but not guaranteed
All who are otherwise eligible for a Roth IRA are eligible to participate via electronic banking, and once the account is opened, by personal check.
Fees:
- First year fee of $18, plus 18 basis points (bp) on invested assets, 27 bp for target date funds, 85bp on the Global Growth fund
- Second and subsequent year fee of $30, plus the same bp charges
Distributions are payable by ACH deposit to bank account. Payment by check is subject to a $5 fee (waived during first 90 days after funding occurs).

One too many similarities

MarylandSaves also gets a passing grade—much like OregonSaves and CalSavers.[iii] Simply, more workers will be saving than in the past. People are inert—many fail to fully consider their choices. Some describe this as the “default effect”, others call it a “framing effect”—the tendency to favor the default option when given a choice between several options. Our decisions are significantly affected by how options are presented. And, once in place, defaults are sticky. The status quo bias may soon set in – the tendency to prefer things to stay relatively the same

Using the more traditional grade scale, MarylandSaves might even qualify for a “C-”—a whole grade level better than OregonSaves and CalSavers. Why? Among other reasons, MarylandSaves incorporates some thoughtful design features—the ability to direct all investments, a GIC (instead of a Money Market) as the capital preservation investment, unique payout options, and embrace of electronic banking for those who would voluntarily enroll. However, solely because of the fees, a D- seems just as appropriate here. Those fees will have a substantial negative impact on the value most everyday workers receive from MarylandSaves.

Assuming savings rates in Maryland are similar to savings rates experienced in Oregon and California, and that the median wage of Maryland participants is modest, we would expect the cumulative contribution for the median account balance to be less than $1,000 during most of the first year or two.[iv] That is, half or more of participants will have an average account balance of less than $1,000 during the first year of participation. As a result, the fees in that initial year are likely to exceed 250 basis points for many, perhaps most MarylandSaves participants.

For comparison, some financial services firms offer Roth IRAs with no fees and no minimum balance requirement.[v] Similarly, some financial services firms now offer Target Date Funds with significantly lower asset management fees.[vi]

Based on others experience to date, MarylandSaves could have better served Maryland workers by petitioning the state to amend the code to allow for alternative compliance options. They could have pursued a change so that an employer could comply by selecting a Roth IRA that offers comparable or superior features with lower costs – perhaps less processing burdens (say by allowing for contributions via split paychecks).

At this point, ALL Maryland workers would be better served by saving in a superior alternative already available in the individual marketplace.

Feel free to reach out to discuss, debate, or criticize my assessment. Contact me at: jacktowarnicky@gmail.com

Disclaimer #1: My comments are my own based on my past experiences in plan sponsor roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.

Disclaimer #2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.

[i] MarylandSaves Launches Innovative Paycheck Savings Program. 9/15/22, Accessed 9/15/22 at: https://www.marketwatch.com/press-release/marylandsaves-launches-innovative-paycheck-savings-program-2022-09-15?siteid=nbkh

[ii] MarylandSaves Program Description, Accessed 9/15/22 at: https://marylandsaves.com/uploads/attachments/cl7ry3sfkaet30jpe45b5cxvb-marylandsaves-program-description-final-09062022.pdf

[iii] J. Towarnicky, State-Run IRAs Are Similar, and Suboptimal: Opinion, Payroll deduction is so 20th Century, 6/29/22, Accessed 9/15/22 at: https://401kspecialistmag.com/calsavers-is-similar-to-oregonsaves-and-suboptimal-opinion/

[iv] Income Calculator Per State Calculator. Assumes workers contribute 5% of pay, and the vast majority defaulted into IRAs will have wages below the 30^th percentile in Maryland, ~$35,000. Accessed 9/15/22 at: https://dqydj.com/income-percentile-by-state-calculator/

[v] For example, see Fidelity Roth IRA, Accessed 9/15/22 at: https://www.fidelity.com/retirement-ira/roth-ira

[vi] R. Berger, B. Curry, The Best Target Date Funds For Retirement, Forbes, 6/1/22. Fidelity Freedom Index 2060 (FDKLX), 12 basis points (bp); Vanguard Target Retirement 2060 (VTTSX), 8 bp; State Street Target Retirement 2060 (SSDYX), 9 bp. Accessed 9/15/22 at: https://www.forbes.com/advisor/retirement/best-target-date-funds/#:~:text=The%20Fidelity%20Freedom%20Index%202060,the%20fund%20is%20very%20affordable