Are State-run retirement plans feasible? Could State-run plans effectively relieve the employer of the responsibility of running a defined contribution plan such as a 401(k)? We may not know the answer to that question for years to come, but the efforts are well under way. However, the possibilities are growing as a number of States and even federal programs to provide state-run IRA’s are taking root.
The latest state to offer a state-run retirement plan is plan is Oregon. Billed as the “first state-run 401(k)”, the Oregon plan is actually a Roth IRA, officially called the Oregon Retirement Savings Plan (ORSP). It was announced earlier this week that Pennsylvania-based Ascensus was chosen as the plan provider for ORSP.
Conventional Defined Contribution Plans Like 401(k) Are Failing
The record is pretty clear on the state of (private)conventional plans such as 401(k)…less than half of workers in the US are covered and the outcomes for individuals is far undershooting the goals for retirement. Not to place blame, but the state of US retirement readiness is just short of disastrous and is getting worse. But with a back-drop of the US Social Security system and the Affordable Care Act as examples of state-run public benefit programs, the public may be less than enthusiastic. Not to mention a new administration in Washington that favors private solutions.
Why Would State-run Plans Be Different?
Unlike other state-run plans ORSP does include a limited role for employers. According to the ORSP web site the employer role is as follows:
The anticipated employer role will be limited, but important
If you have eligible employees, your role will be to facilitate participation in the program, including support such as:
- Notifying employees of their eligibility using standard materials
- Accepting and retaining employee decision information (opt out, or for non-standard elections)
- Executing payroll deductions for employees
- Remitting employee payroll deductions to retirement provider
Employers do not make matching contributions, nor do they have any financial obligations
Under this program, employers are not allowed to make contributions or to match employee contributions.
The ORSP model may not have been feasible from a cost/fee standpoint without an agreement by Ascensus to cover upfront starting costs for the plan (usually covered by the Plan Sponsor in a conventional 401(k) plan).
The ORSP model is unique in its design because of its hybrid approach, and may become a model for other State-run plans. If so, this could be a sea-change for employers being burdened by administration and regulation of retirement plans. It also threatens to reshape the entire ecosystem of the retirement industry.
In a study conducted by the Center For Retirement Research at Boston College, entitled: STATE AUTO-IRA PROGRAMS: THE KEYS TO FINANCIAL SELF-SUFFICIENCY the issue of costs associated with State-run retirement plans was analyzed and the following conclusions were drawn:
States implementing auto-IRAs want programs that pay for themselves and charge modest fees for participants. These goals are achievable even though the programs will incur initial losses due to non-trivial start-up costs, low assets, and fixed per-account costs; and these losses may take some time to pay off. The keys to success seem to be a willingness to: 1) charge higher fees in the short run or keep fees lower by financing start-up costs over a longer time period; 2) set meaningful contribution rates; and 3) keep per account costs low.
