While most industry experts are extolling efforts by states to require employers to offer a retirement plan at work, Morningstar’s director of policy research warns that these auto-IRA, state run plans are not a substitute for full-fledged retirement plans under ERISA like 401ks.
Though better than nothing, there are many shortfalls of these plans as states attempt to make them as easy and as painless as possible for employers. These shortfalls, according to Morningstar, include:
- No company match
- Limited deferral limits ($5500 in one case v. $18,000 for 401k plans)
- Conservative default investments (Government bonds for the California initiative)
- Limitations on rolling accounts into a 401k plan
Some question whether state governments are equipped to run private retirement plans even as many outsource much of the work. There’s also the danger that employers with a more robust defined contribution plan may opt out to the scaled down state version which will likely be easier and cheaper to administer offering lower liability.
Yet experts like Kathleen Kennedy Townsend, former lieutenant governor of Maryland and founder of the Center on Retirement Initiatives at Georgetown University, and Gary Kleinschmidt, director of retirement sales at Legg Mason, believe that these state plans will ease smaller companies that might be reluctant to start a 401k plan into the market. California, which passed legislation in September 2016, estimates that there are 7.5 million workers without access to a retirement plan at work
The technology deployed by state auto-IRAs might also move the 401k industry to offer simpler and less costly plans now driven by robo record keepers and many companies within the state systems may decide to upgrade to 401k plans.
With legislation moving through the Senate to allow for open MEPs, the race is on to provide access to retirement plans for the 50% of workers without it now. The question is whether the state initiatives will slow down private sector plans or whether it will provide a gateway and access to companies that would otherwise start a 401k plan.
