The first state auto-IRA plan is up and running. OregonSaves, which launched last year, has more than 19,000 individuals and 300 companies participating. What does this mean for financial advisers?
Oregon's foray into the retirement arena is not an isolated event. Nine states have passed legislation enabling some form of state-sponsored plan for workers not covered by ERISA plans from their employers. Most are expected to bring the plans online this year or next.
State plans can take various forms, but five of the nine are introducing auto-IRAs: Oregon, California, Connecticut, Illinois and Maryland. The other four — Massachusetts, New Jersey, Vermont and Washington — will use marketplaces to connect industry providers with small businesses, multiple employer plans or a customized approach.
A defining feature of these state-sponsored plans is that they seek to avoid ERISA coverage. The statutory provisions of the enacting state legislation generally clarify that the affected employers are not fiduciaries and have no duties other than to make participants aware of the program and to set up enrollment and automatic payroll deductions.
The Obama administration had promulgated rules through the Department of Labor to create safe harbors exempting state plans from ERISA, but the Trump administration killed them. Even so, states are moving forward and are prepared to defend their presumed right to do so.
"Auto-IRA" plans get their name from the fact that employers automatically deduct contributions from employees' paychecks and deposit them into IRAs, with no required employer contribution. Fearing a future in which large numbers of their residents are ill-prepared for retirement and dependent on social services, states say they must attack the looming retirement crisis directly to fill the void in federal leadership. The approach is attractive for its simplicity, flexibility and ability to control costs through economies of scale.
In Oregon, each enrolled participant (in a pool of 1 million eligible workers) has an individual Roth IRA. Deductions begin at 5% of gross pay and increase by 1% each year until reaching a maximum 10%. Employers are prohibited from making matching contributions. Participants can opt out if they so choose. The first $1,000 in each account is invested in a professionally managed money market fund. Additional contributions are directed into a target-date fund based on the worker's age. Both funds are managed by State Street Global Advisors.
Although the state-sponsored retirement programs are targeted to businesses and workers without qualified plans (estimated to be half of the U.S. workforce), retirement advisers won't be left out of the loop for long. Business owners and plan participants are going to need advice about the plans and the assets in them. For example, advisers with clients who are small business owners are often asked how to set up a retirement plan for their company. They will want to know about the pros and cons of the ERISA and state-sponsored plan alternatives.
Some, including the American Retirement Association, have suggested that the new federal tax law has changed the calculus of offering an ERISA plan for small businesses that qualify for the highly favorable pass-through deduction of 20%. They say that under certain circumstances, business owners eligible for the new pass-through rate may benefit more by not sponsoring a qualified plan and instead saving for retirement in a taxable account. While these circumstances may be rare, advisers may be called upon to do the analysis.
Advisers are also likely to be called upon for help when a client in an auto-IRA plan is ready to retire or take another job. Under the DOL's fiduciary rule, advice on distributable retirement assets is a fiduciary act. The fiduciary adviser will need to compare the available options: staying in the state plan, transferring to a plan at the new employer, rolling over to an IRA at the adviser's firm or taking the assets as a distribution.
The new state-sponsored plans have the potential to help close the retirement saving gap for millions of workers who are not now covered by ERISA plans. While the plans are not likely to be on advisers' radar screens currently, that will change as more states come online and businesses and participants start looking for help.
Blaine F. Aikin is executive chairman of fi360 Inc.