While most Americans are not aware of it, a broad nationwide trend is underway that could profoundly impact the choices and tools that are available to them as they plan for retirement. Across the country, state legislators have introduced bills that would establish state-run or state-assisted retirement plans for private sector workers who do not participate in an employer-sponsored plan; others are considering bills that would create exploratory task forces and studies on the feasibility of such plans. In 2014 alone, lawmakers in 14 states proposed 26 separate bills along these lines.
I applaud these legislators' efforts to address the issue of retirement readiness in their states. As a recent Federal Reserve survey pointed out, 31% of Americans currently have no savings or pension assets set aside to help them through retirement. Clearly, this is a serious problem that both industry and policymakers must work together to solve.
(Read the related story: "States take auto IRAs into own hands while Washington dawdles.")
Unfortunately, the proposals that have emerged in the states to implement state-run retirement plans could very well take us in exactly the wrong direction. Despite state lawmakers' best intentions, the net result of these efforts could be a reduction in investor choice and further limitation of access to high-quality, objective financial guidance. A retirement plan is of little use if affordable, independent advice is not available to the participants.
FSI has engaged directly on these proposals in 9 states in 2014; although the bills in the other 5 states were not expected to pass, we also monitored them closely, as well. While we are happy to report that none of the bills passed this year, much additional work remains ahead of us.
State-run retirement plans for private sector workers would immediately undermine the incentives for small businesses that do not currently offer employer-sponsored plans to establish their own plans in the future. While small business owners today are motivated to implement robust retirement plan options in order to continue to attract employees as their businesses grow, many would be tempted to simply “offload” these initiatives to the state if state-run plans were available. Established businesses, as well, would have an incentive to eliminate their own plans in order to reduce workloads for their human relations groups and other personnel.
As more employers came to “offload” their retirement plan offerings to the respective states (or simply neglect to develop them in the first place), many experienced financial advisers in each area — who have been ethically advising plan sponsors for years — would simply be forced to leave the market. The result would be a reduction in access to professional financial advice, rather than the expansion of access that American workers so badly need.
It is further troubling that many of these proposals explicitly exclude financial advisers from their lists of eligible “vendors” to advise or support the plans. These exclusions mean that participants would be completely cut off from the very professionals who are most qualified to help them.
(Flip through the related slideshow: "Which states are tackling retirement security, and how?")
These proposals would also create substantial new costs for states and taxpayers, and would open states to potential liability to the IRS and to the Department of Labor under ERISA. While many of the bills' sponsors envision these plans as low-cost solutions, the true expenses of running a large and robust retirement plan — including ensuring that the plans are properly managed; that investment options are appropriate and are adjusted as necessary; and that plan activities are closely monitored to prevent prohibited transactions, among many others — could easily and quickly derail these expectations.
In addition to the ongoing expenses mentioned above, taxpayers would be on the hook for substantial costs just to get the plans off the ground. When start-up outlays for plan research and design, legal and tax expenses associated with obtaining IRS approval, and many other expenses are factored in, it becomes clear that these states would be incurring significant costs to provide a service that is already broadly available in the private market.
FSI and our members are pleased to see state legislators around the country taking a hard look at Americans' retirement readiness and committing themselves to alleviating the problem. We look forward to engaging with legislators in the months and years ahead to help shape proposals that provide Main Street investors with the retirement planning options they desperately need by expanding access to high-quality, unbiased and professional financial advice.
At the same time, however, we cannot sit on the sidelines while costly, disruptive and ultimately damaging proposals to create state-run retirement plans are under consideration in state houses across the country. While this trend has flown under the radar until now, we and our members will continue to engage on this issue for the benefit of our industry and our clients.
Dale E. Brown is president and chief executive of the Financial Services Institute Inc.