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Legal or Not, States Forge Ahead With 401(k)-for-Everyone Plans

Congress jeopardized the future of state plans to help private employees save for retirement. States don't seem to care.

retirement worker main photo
(David Kidd)
Matt Birong spent years cooking in upscale restaurants in Boston and New York City. In an industry notorious for low wages and zero benefits, he did something very unusual: He opened a retirement savings account for himself. Birong admits that if his parents hadn’t insisted he do so, he likely would have skipped the process. Even then, the notion of setting up an investment plan on his own would have been overwhelming if he didn’t have a trusted friend in the financial services industry to walk him through it. 

Now, as owner and head chef of 3 Squares Café south of Burlington, Vt., Birong wishes he could do the same thing for his employees. He already offers other unusual perks for the industry to attract quality and loyal workers, such as paid time off after one year of service. But setting up a retirement savings program for his roughly 15 employees? “I’ve got my head under a sink making sure the water’s not leaking on the tenants downstairs,” he says. “I just don’t have the time; it’s not that I don’t want to.”

Birong’s situation is similar to that of many small-business owners across the country and is a big reason why half of private-sector workers don’t have an employer-sponsored retirement plan. Of those 57 million people, only a small percentage have saved on their own and those savings are generally paltry. According to the National Institute on Retirement Security, the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.

Some states want to change that. This July, Oregon became the first to offer a retirement plan to full- and part-time private-sector workers who don’t have access to one through their employer. Eight other states -- California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Vermont and Washington -- are implementing similar plans that should reach full rollout within the next five years. In general, the programs will run independently from the state and will be paid for through retirement account fees. When the nine state plans are up and running, they will serve roughly one-quarter of private-sector workers across the country. In California alone, the plans will cover nearly 7 million people.


Chef and restaurant owner Matt Birong says he'd welcome a state-run retirement plan for his employees. (Letter 10 Creative)

This effort to close what many feel is a retirement security gap among working Americans has been batted around for more than a decade, first at the federal level and then by states. During President Barack Obama’s first term, he proposed a national retirement savings program that would automatically enroll workers with an option to opt out. The effort stalled in Congress, so in 2015 the administration launched its myRA program, a voluntary retirement program for workers who could afford only small monthly contributions. By then, states were pushing hard to offer their own retirement plans. California in 2012 and Connecticut in 2014 set up feasibility studies for a state-run retirement plan for private workers. Illinois in 2015 became the first state to pass legislation approving such a program. And last year, California and Connecticut released the findings from their studies, which helped spur adoption of retirement programs in those states and in a handful of others.

But just as the momentum seemed to be building for the programs, Congress delivered a blow to the concept. Earlier this year, it reversed an Obama administration rule that exempted state-run individual retirement account (IRA) plans from some aspects of the Employee Retirement Income Security Act (ERISA), thus calling into question states’ legal authority to sponsor private-sector retirement programs. The move, which was a surprise to many, was spurred by financial groups that opposed these programs. But that isn’t stopping the nine states from moving forward with their plans -- and several more may join them. This determination to push on suggests that states are willing to solve the national retirement crisis without federal help and despite federal roadblocks.

There’s certainly good reason to see the retirement crisis as a state problem: Research shows that it is states that will be footing the bill for Americans who aren’t financially prepared to enter their golden years. “Nothing has happened at the federal level,” says Rocky Joyner, vice president and actuary at the financial firm Segal Consulting. “State officials are saying, ‘These people are retiring in my community, in my state.’”

That reality is one reason why Segal Consulting conducted an analysis looking at what would happen if all full-time workers gained access to retirement plans. The findings, released earlier this year, show that states could save big on future Medicaid costs: a collective $5 billion in the first decade. These savings would be a result of potentially vulnerable households being removed from the poverty rolls by the time they retire. More specifically, the Segal study found that in the first 10 years after a retirement savings plan is introduced, 15 states would save more than $100 million each in Medicaid payments; California and New York alone would combine to save more than $1.1 billion.

The study has validated what experts have long warned -- that states will ultimately pay for poor retirees. That notion has helped fuel bipartisan support in an era of constrained finances. “This is an approach where we can save taxpayer dollars,” says Sarah Gill, senior legislative representative for AARP. “This is not a red or blue state issue.” In fact, the idea of having a government-sponsored, automatic-enrollment IRA plan actually came from a 2006 paper co-authored by researchers from the moderate-left Brookings Institution and the conservative-leaning Heritage Foundation.

But while Republican-dominated states such as Arkansas and Utah are looking at establishing retirement savings programs, the issue has gained the most traction in states with Democratic leadership. That difference likely has to do with the policy’s two biggest opponents: businesses and the insurance and financial industry -- traditionally conservative groups that feel the programs are either too burdensome or in some other way meddle with the private sector. 

The ERISA Industry Committee, which lobbies on behalf of large employers that generally already sponsor retirement savings programs, has pushed back against any policy that they believe might be burdensome for their members. For example, Oregon is one of six states that requires employers to participate in the state program if they don’t already offer their own retirement plan. In that state, the committee successfully lobbied to simplify what businesses providing a savings plan have to do to be exempt from participating in OregonSaves. Meanwhile, the insurance and financial industry has protested the programs on the grounds that they are government overreach and aren’t necessary. “Anyone can walk into any of our offices today and come out a couple hours later with a retirement plan that fits their individual needs,” says Gary Sanders, a lobbyist for the National Association of Insurance and Financial Advisors. 

When asked why people don’t already do so, Sanders says the disconnect is due to a lack of financial education and desire to save. He points to the relatively low enrollment (about 20,000) in Obama’s myRA since launching in late 2015. Sanders also says the mandate for employers to participate in state plans and facilitate the payroll deduction is a burden. And he disputes the idea that state-sponsored retirement programs would create more business for his members. Even when states choose a private-sector company to run the programs, Sanders says, “you have [businesses that are] winners and losers.” 

Advocates for state-run programs have scoffed at such claims. The myRA program, they say, puts the onus on savers to seek it out and sign up. State programs, on the other hand, auto-enroll employees -- a feature that research has shown makes people 15 times more likely to save for retirement. Besides, advocates argue, research by the Pew Charitable Trusts has found that small-business owners view sponsoring their own retirement savings program as overwhelming and expensive. “The retirement industry just didn’t want competition,” says Illinois Treasurer Michael Frerichs.

This past January the opposition  to state-run retirement plans found a sympathetic ear in Congress. House Republicans moved to block states’ and localities’ efforts to establish these plans by passing a resolution overturning a Department of Labor rule last year that reaffirmed governments’ legal right to sponsor private-sector savings programs for small businesses. Referred to as the “safe harbor” rule, it specifically exempted state and potential city savings plans from ERISA, which governs private retirement plans and requires certain legal and financial protections for plan enrollees. The measure easily passed in the House, and after more than a month of stalling, the Senate narrowly approved the resolution despite a bipartisan outcry from state and local officials and AARP.

The effort played upon one of the central weaknesses of a state-sponsored retirement plan: While the vast majority of small-business owners support the idea of offering auto-IRAs to their employees, most oppose the plans being sponsored and administered by the state or the federal government, according to a survey conducted by Pew. Seemingly, the negative news regarding many governments’ growing public pension liabilities has cast a cloud over states getting involved in any kind of new retirement plan -- even one where the state has no liability. Oregon Treasurer Tobias Read says he still has to dispel the myth that OregonSaves is a pension plan. 

But many feel this perception problem can be fixed. At a retirement conference in Washington, D.C., this winter, John Scott, who directs the retirement savings project at Pew, noted the survey also found that small employers are more comfortable with mutual fund and insurance companies taking the helm as an auto-IRA sponsor. He said that respondents likely thought that government sponsorship meant that taxpayers would be liable for the plans. “If we had explained that sponsorship means partnering with a financial services company,” he said, “we most likely would have seen a higher level of support.”


Research shows that it is states that will be footing the bill for Americans who aren’t financially prepared to enter their golden years. (Shutterstock)

Despite congressional action this year, all states that had already approved a retirement savings program are moving ahead to implement it. There is widespread sense that this is the most beneficial road to take -- for the state as well as low-income workers. “There are dire consequences to individuals -- to communities -- when you have people who don’t have a secure life and long-term stability,” says California State Treasurer John Chiang.

The plans -- often called Secure Choice -- mainly follow one of two structures. In New Jersey and Washington, for example,  the plans are offered through a marketplace. Businesses’ participation is voluntary, but if they opt in they can decide to work with private entities to create their own plan or they can choose a plan through the state to auto-enroll their workers. This approach has met the least amount of resistance from the National Association of Insurance and Financial Advisors, as it allows financial service companies to compete against each other for clients.

The more common course employed by states, however, is a program where a service provider is selected by the state to run and administer the retirement program. Workers are auto-enrolled into an IRA retirement plan in places where the employer doesn’t offer one. Each plan that follows this structure still has its own unique components. Maryland, for example, is waiving the annual business license fee for businesses that already offer a retirement plan and for businesses that eventually will through the state.

Vermont’s plan is a multiple employer plan, and it is voluntary for employers. Those who opt in will auto-enroll employees into the Green Mountain Secure Retirement Plan. It is ERISA-compliant, and so is largely unaffected by the congressional action. Massachusetts passed a similar plan in 2012 for nonprofits. So far, however, the state has been unsuccessful at passing an auto-IRA plan for all workplaces.

In every case, the programs are phased in. Oregon, for example, first rolled out OregonSaves as a pilot program to 11 businesses covering about 150 employees. The state plans to initiate a second pilot program in October and use what it learns from the pilots to fully launch in January, with larger employers going first. 

Despite Congress’ repeal of the safe harbor rule, state officials say they are still on solid legal ground: The 2016 rule simply clarified that employers wouldn’t have to comply with ERISA under a government-sponsored retirement plan. In other words, there is no rule or law that says governments have to comply with ERISA. Some state treasurers have sought out legal opinions to back up their beliefs. Others think the issue will ultimately be decided by the courts. 

Sanders, the lobbyist, says his group isn’t planning on filing any lawsuits but notes that former Labor Secretary Tom Perez had said that the safe harbor rule was issued to help “reduce the risk” of ERISA exposure. “It’s a really complicated law and subject,” he says. “I don’t think it’s a certainty either way and I think there is the possibility of a lawsuit.”

 But those who have pushed states to adopt these plans believe that the fight this past spring will ultimately help propel them forward. More of them may adopt a marketplace approach or even a multiple employer plan like Vermont. But at a minimum, states have not shied away from talking about securing a savings plan for workers. In addition to Arkansas and Utah, programs are being debated in New Mexico, New York, North Carolina, South Carolina and Wisconsin. “The [ERISA rule] repeal was certainly something they took seriously,” says AARP’s Gill. “But the [general] reaction of states has been to double down.”

That’s good news for small employers like Birong, who says offering retirement benefits is another way for his business to stand out and encourage employee loyalty. He also believes political resistance elsewhere will eventually weaken in the face of real results in early adoption states. “Financial firms are not going to chase a business with 15 people like mine,” he says. “But you throw 1,500 in a pool? That’s a huge account.” 

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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