As states roll out retirement plans, legal challenges loom
A little more than a year ago, Oregon became the first state to embark on a novel experiment, offering a state-run IRA that could become a model for other states looking to encourage more workers to put away money away in a retirement plans.
Those programs, geared for workers who don't have access to a plan through their employer, could also create a new wrinkle in the retirement-planning sector, prompting plan advisors and brokers to sit up and take notice.
Opinion within the industry is decidedly mixed.
Some groups are lauding the OregonSaves program and similar initiatives in other states as a boon for plan advisors, driving up participation in retirement plans, and thereby increasing opportunity for advisors. Others, however, see unwelcome government competition with the private plans they are trying to market and sell.
Under the program, all Oregon employers will eventually have to offer their employees a retirement plan with contributions facilitated by payroll deductions. Businesses that already offer a qualified plan won't need to do anything different, but those that don't will either have to roll out a plan of their own, or, for most, adopt the state-run plan.
Meantime, the future of the state-run programs is highly uncertain. Anticipated legal challenges could determine whether those measures will survive in their current form — if at all.
Other states have been developing their own retirement plans, but OregonSaves was the first out of the gate, earlier this month marking the first anniversary of a program that is now taking contributions from about 33,000 Oregonians, according to state officials. In the first year, participants in the plan contributed $4.6 million, with an average individual contribution of $106 per month, the state said.
"We always talk about a year ago the folks that are saving in this plan had no money saved for retirement, and now many of these folks are on the way to a little more security as they save for their retirement years," says Michael Parker, executive director of the Oregon Savings Network, an office within the state treasury that administers the OregonSaves plan. "I think it's going to turn into really good public policy."
Oregon's program is patterned after a blueprint for state-run retirement plans known generally as Secure Choice, a model that has come under consideration in dozens of state legislatures. All told, some 40 states have begun to evaluate some type of state-facilitated retirement program since 2012, according to Georgetown University's Center for Retirement Initiatives.
So far, 10 states and one city — Seattle — have adopted some form of retirement legislation, according to the center. Those programs vary considerably, however. States like Oregon and Illinois. Others offer a state-run plan, but don't impose an employer mandate. Washington and New Jersey are simply offering an online marketplace where residents can shop for private plans.
California, Connecticut, Illinois, Maryland and Oregon have embraced the Secure Choice model, with an employer mandate and a state-run plan that automatically enrolls workers, and then allowing them to opt out. New York is working to roll out a state-run retirement option, but will not require employers to offer a plan. Washington and New Jersey have moved to set up an online marketplace where residents can shop for plans, but they aren't offering a state-run plan and do not impose any employer mandate. Meanwhile, Massachusetts and Vermont offer a state-run multi-employer plan, but also don't have an employer mandate. The Massachusetts plan is narrowly targeted to nonprofit organizations with 20 or fewer employees.
These efforts come in response to the concern that millions of Americans aren't saving enough for retirement, and that the most effective way to encourage savings is through an employer plan where contributions are made through payroll deductions.
In a 2017 study, the Pew Charitable Trusts found that 35% of private-sector workers aged 22 or older did not have access to an employer-sponsored retirement plan. The AARP’s Public Policy Institute reports that workers with a payroll-deduction plan are 15 times more likely to save for retirement than those who don't.
The AARP is supportive of state measures to expand retirement savings options, as is the National Association of Plan Advisors.
An opportunity for advisers
"From our organization's perspective, the most important policy lever for these state programs are the requirements for businesses to have a plan," says Andrew Remo, director of legislative affairs at the American Retirement Association, which counts NAPA as a member organization.
"It doesn't have to be the state plan," Remo says, but the mandate for businesses to offer a plan of some kind "promises a lot of opportunity for plan advisors."
On the other hand, NAPA opposes efforts by the states that offer a plan of their own, but don't back it up with any mandate for businesses.
"As an organization, we are more leery of that — the state just getting involved to offer a product that competes with all other products in the marketplace," Remo says.
But that is one of the central criticisms that other business organizations level against the Secure Choice framework in the first place. Groups like the National Association of Insurance and Financial Advisors are opposing state-run plans, arguing that with or without a mandate, those programs put the government in direct competition with the private sector.
"Our members, they market retirement products," says Gary Sanders, counsel at NAIFA and the group's vice president of government relations. "They don't see any reason, quite frankly, to compete with the state."
By contrast, NAIFA supports the marketplace model embraced by Washington and New Jersey, which have opted not to offer state-run plans.
Both Remo and Sanders agree that momentum for new retirement initiatives appears to have cooled in state legislatures across the country in the last couple years. Significant legal questions about those programs remain, and many states likely are watching to see how the early adopters' programs work out. Illinois began the trial of its program in May, and California and Connecticut are working to get their programs up and running.
"These laws aren't going away," Remo says. "All the other states are in a wait-and-see mode to see how Oregon's plan is proceeding, eventually see how Illinois' plan is proceeding."
A program of last resort
In Oregon, Parker bills the state's program as a response to a failed status quo that has left 1 million workers without a plan available through an employer.
"[I]t is important to reiterate that OregonSaves is not competing with the plan advisors," he says. "There is a public policy goal in Oregon to make a savings option available to every worker. We are a program of last resort and made available when employers do not elect to offer a different plan to their workers."
Still, some Oregon plan advisors take a dim view of their state's offering.
"Most business owners are naturally suspicious and frustrated by another government mandate," says Ashley Micciche, CEO of True North Retirement Advisors, based in Clackamas, Oregon. "I think a good plan advisor who understands the marketplace and the immense limitations of the OregonSaves plan can make an effective argument for why an employer should look at other options."
What of those limitations? Micciche points to significant "cost compression" in the 401(k) space that has given rise to an array of plans that offer low fees, tailored portfolio construction and high-touch service and support for the sponsor and participants.
"I think a lot of employers will begin with OregonSaves and will graduate to a 401(k) plan once they realize they have all these headaches with facilitating the plan," she says. "There is very limited help from OregonSaves, in general."
Parker rejects that contention, saying that the plan's administrative contractor has been able to accommodate every request for a meeting with its field reps, while a client services team works overtime fielding questions about the plan.
But for some employers, the notion of a government-run plan is a non-starter. Tim Wood, a principal at Foster & Wood Retirement Plan Advisors in Lake Oswego, Oregon, recalls working with a company last year that was hit with the mandate to roll out a defined-contribution retirement plan, but rejected the state option.
"[T]hey specifically wanted a private plan so the state was not in their business any more than they already are," Wood says. "In the CFO's words, 'Why would we want the same people that run the DMV running our retirement plan?' I thought it was a good question."
But in any scenario that employers end up offering their workers a plan — whether the state plan or a private alternative — where none had been available before, Parker counts that as a win for the policy objective of getting more people saving for retirement.
"[W]e are happy when employers offer a different option to their workers," he says. "But if employers elect to not offer a plan, then OregonSaves is available and is providing a valuable service. Remember that plan managers have had the opportunity forever to serve this population but have not done so. They still can do so."