For professionals in the financial services industry, the prospect of state-run or state-facilitated retirement plans may seem a little frightening, but researchers say advisors have nothing to fear from these increasingly common plans.
In fact, they could be beneficial to the industry.
As Angela Antonelli, a research professor with Georgetown University’s Center for Retirement Initiatives points out, state-run plans are making Americans more aware of their retirement savings or lack thereof.
“The state-facilitated retirement savings plans really came out of the reality that there is a retirement savings crisis and challenge that exists,” Antonelli said. “If you look at the data, at this point, most individuals and families do not have much saved for retirement.”
The increasing popularity in these plans is due to this lack of savings and the shift from defined-benefit plans (pensions) to defined-contribution plans.
The state-run plans are not so popular with the National Association of Insurance and Financial Advisors. NAIFA cites competition with private-market programs and disbelief of an access crisis as their main reasons for opposing state-run plans. NAIFA’s statement reads:
“NAIFA understands the importance of retirement security and acknowledges that many Americans are not saving enough for retirement. However, NAIFA does not believe that a state-run plan that competes with private market plans is the answer. Availability and access to retirement savings options are not the problem — there already exists a strong, vibrant private sector retirement plan market that offers diverse, affordable options to individuals and employers.”
In contrast, she said that by shining a brighter light on the retirement savings gap, states are creating a path to savings, and possibly wealth, for Americans without which retirement would have been a struggle to achieve, if not impossible.
To date, the enacted state-run plans have given 20 million Americans access to retirement savings plans. This means more people with wealth who will need the advice of a trusted professional, as well as continued education on savings, investments and financial literacy to protect their hard-earned assets.
With more people seeking planning, Antonelli said about advisors, “It’s ultimately beneficial to them.”
Creating A National Conversation
Post-2008, bipartisan cooperation rapidly evaporated, and with it so did the potential for an auto-IRA program at the federal level. Citing this deterioration of bipartisan cooperation, Antonelli said the need for these state-run plans was apparent and necessary.
“In the absence of the federal government doing anything to really address the lack of retirement savings and the fact that it has gotten worse over time — and that trend is not a good one because many lack access to a way to save — the states have stepped up and said, ‘look, we’ve got to address this.’”
But this isn’t a new problem. “This coverage gap of more than half of the private-sector workforce is one that has existed for more than 40 years,” Antonelli said.
In fact, states across the nation have been exploring the possibility of state-run retirement plans for more than a decade because as individuals with inadequate or no retirement funds age, they rely more and more on public programs. As the number of people depending on those programs increases, it can be a serious drain on a state’s resources.
Similar to how an advisor would advocate for their client’s best interest, states have jump-started a national dialogue about the ever-growing retirement savings gap.
“If more states are enacting these programs, some would say that that might help to encourage and spur action at the national level,” Antonelli said.
But Antonelli said she isn’t getting her hopes up about a national program taking center stage and replacing the state-run programs.
“These proposals have been around for a long time and yet, nothing has happened,” she said.
Sharing another similarity with advisors, Antonelli said the state-run savings plans highlight the importance of saving for retirement.
“I think a lot of young people are skeptical about whether Social Security will even be around,” Antonelli said. “We need to take on the responsibility that has been put on us to save for our own retirement.”
Advisors, Familiarize Yourselves With The Policies
Before advisors jump to conclusions about what these plans are and aren’t, it’s best to study up on what steps your state has taken to put a retirement savings plan in place.
These plans vary by state following one of four models. This means advisors need to be informed about retirement plan legislation being considered and advisors should be not just familiar with them, but knowledgeable on their state’s retirement plan laws.
The one thing that Antonelli made clear was that these state-run plans are not in any way competition for advisors or replacements for fine-tuned financial planning.
“The state-facilitated plans are addressing a gap in the market that the private sector hasn’t addressed. What the state is doing really doesn’t compete with the private sector, it fills a gap,” Antonelli said. “There’s an increased understanding now that more folks have seen these programs, that they are, in fact, complementary.”
Antonelli said these plans “operate as IRAs,” which means they could benefit from the same recommendations and oversights of a professional just as any other IRA would.
If anything, Antonelli said these plans create opportunities for advisors.
“Advisors and insurance agents want to be able to do more,” she said. “[These plans] push the private sector to do more, to do better.”
What States Are Doing
In 2018 alone, 16 states and one city introduced legislation to tackle the growing issue of the retirement savings gap among private-sector workers.
In six years, 40 states moved to consider, study or implement legislation, leading to the creation of state-run retirement savings programs. Of those 40 states, 11 have moved to establish retirement savings programs. Data from Georgetown University’s Center for Retirement Initiatives shows that several states and cities stated goals to pursue these programs in 2019.
Only 28 percent of full-time workers without access to employer-sponsored plans report having any other retirement savings such as an individual retirement account or 401(k), according to a 2016 Pew Charitable Trusts survey of private-sector workers for small to midsize businesses. Statistics like this one explain the push for states to create state-run retirement programs.
Enacted Savings Programs
Already, 10 states and a city have enacted state-run retirement plans. Those include California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, Washington and the city of Seattle.
All of the 11 enacted programs follow one of these four models:
Auto-IRA — According to the Internal Revenue Service, an auto-IRA is an automatic contribution arrangement (also known as automatic enrollment), which is a feature in a retirement plan that allows an employer to “enroll” an eligible employee in the employer's plan unless the employee affirmatively elects otherwise.
Multiple Employer Plan — A MEP is a type of employee benefit plan that can be maintained as a single plan in which two or more unrelated employers participate.
Marketplace — Think of this like the Affordable Care Act marketplace. Firms participating in the marketplace offer a minimum of two product options for the employee to choose from. Participation is voluntary.
Voluntary Payroll Deduction IRA — The New York State Secure Choice Savings Program Board establishes default investment options for enrollees who fail to elect an investment option. This is structured as a Roth IRA and is an automatic enrollment program. New York is the only state currently using this model.
Further details of each state’s plan such as contribution rates, administrative entities, fees and implementation timelines can be viewed at cri.georgetown.edu/states.
States Taking Action
With almost a dozen states embracing some sort of state-run plan, 15 other states are taking notice and studying the need for these plans or are proposing legislation. Those states include Wyoming, Colorado, New Mexico, Kansas, Iowa, Missouri, Wisconsin, Michigan, Tennessee, Georgia, Virginia, Pennsylvania, New Hampshire and Rhode Island.
Fewer than 10 states have made no efforts to create a state retirement program. The accompanying map shows where each state stands on legislative action for state-run retirement plans.