Why State-Based 401k Plans Are a (Really) Bad Thing

States have no business managing anyone’s money

A big ol' NO on state-run 401k plans?A big ol' NO on state-run 401k plans?

“Under the Affordable Care Act, millions of Americans lost the health insurance they liked. Now, the same could happen with their retirement savings.”

Conservative think-tank Heritage Foundation doesn’t think much of the Department of Labor’s state-run 401k plan directive, and took to the pages of the conservative leaning Washington Times to vent.

Heritage’s Rachel Greszler and Melanie Beaulac argue the plan will be bad news for workers and taxpayers.

State-based 401k plans will lack important saver protections because they are not subject to the Employee Retirement Income Security Act of 1974,” they write. “According to the Department of Labor, ERISA regulations ensure plans are ‘established and maintained in a fair and financially sound manner’ and that ’employers have an obligation to provide promised benefits.'”

“Yet, the Department of Labor’s rule could shift a significant portion of Americans’ retirement savings into plans that are explicitly exempt from such requirements.”

Surprisingly, the two lament the fact that employers aren’t forced (and are actually forbidden) from contributing to state-based 401k plans.

“Workers enrolled in these plans will lose out on the average $2,640 per year contribution employers make to each worker’s private retirement fund. Even if employers make up for lost retirement contributions through higher pay, that pay will be taxable whereas retirement contributions are tax-free.”

Worse, they write, new rule prohibits workers from accessing or controlling their state-run accounts if the state opts to set up a defined benefit plan.

“Since many states will require, or at least authorize, companies to automatically enroll new employees into state-based plans, workers could unintentionally have money taken out of their paychecks and put into accounts that they can neither access nor control.”

Perhaps most damning, according to Greszler and Beaulac, is that states have no business managing anyone’s money.

“State and local governments have racked up nearly $5.6 trillion in unfunded pension obligations — and that’s a problem for taxpayers. For example, the retirement fund for Chicago’s public school teachers has an unfunded liability of $9 billion. As a result, for the last seven years, 89 cents of every new dollar for education in Chicago has gone to fund teachers’ pensions — leaving only 11 cents for actual education.”

The Department of Labor’s new rule, they conclude, “would allow states to create the same type of recklessly managed pensions for private sector workers, while leaving taxpayers on the hook for the shortfall.

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