What will be the future of State Auto IRA Plans?
There’s a battle raging in the retirement industry which affects employers of all sizes, lawmakers, financial advisors and the financial services industry which may determine the fate of retirement security for tens of millions of Americans. Are state auto IRA plans for uncovered workers being created or considered by over half of the states and some cities the answer to the problem of 40 million workers who do not have access to a retirement plan at work? Some say they threaten an already robust system under Federal law like 401k plans.
At the heart of the battle is a Congressional resolution which would lift the DOL’s ERISA exemption for state and now city plans (State Auto IRA Plans). Opponents to these plans point to the limited protection to workers while others question whether states and cities are qualified to create and run these plans worried that it may increase state and municipal pension liability which is becoming a major issue for tax payers. Others question whether a patchwork of state retirement plans will make it harder for companies to do business as well as whether these watered-down plans threaten more robust retirement plans like 401ks suggesting the use of multiple employer plans (MEPs) under ERISA pooling companies into one plan.
In a passionate Op-Ed, California Senator Kevin de Leon suggests that state plans like the one he sponsored in California offer important options to the estimated 7 million California workers not covered by ERISA plans at work with no cost to employers and no impact on existing plans. Other proponents suggest that these auto-IRA plans are a good stepping stone for companies that might want to offer more robust retirement plans like 401ks that, for example, offer a match. State plans could also be considered to be pilot programs for a national federal program which could provide a foundation which states and the private sector could expand upon.
The key to an effective 401k or 403b plan is the plan advisor if they have the requisite knowledge, experience and resources but the more experienced plan advisors may not be interested in start-up or smaller plans. The DOL fiduciary rule could force out advisors not focused on the 401k industry who do not want the increased liability further limiting access to qualified advice. If state plans truly are stepping stones for more robust retirement plans like 401ks run by the private sector where there is room for a good plan advisor, then the industry should encourage it as they have done with the recent Oregon plan.
