The financial advice industry should get behind state efforts to enroll workers who don't have access to 401(k) plans in state-sponsored auto-IRA programs.
So far, the industry has been less than enthusiastic about plans such as Oregon's version, called OregonSaves, as have many small employers. But early indications are that the Oregon plan is working to the advantage of employers and employees. As of May 1, 750 employers and 44,280 eligible employees have enrolled in the first stage of the rollout.
But the U.S. economy and the nation's financial system will be far stronger in the future if the 55 million workers currently without such retirement savings accounts, mostly in small companies, can be provided with a tax-deferred way to save.
Many in the industry argue that the state plans are unnecessary because financial advisers will persuade employers to add 401(k)s or other plans, or encourage employees to use individual retirement accounts to save for their retirement. But if those efforts were successful, 55 million employees would not be without coverage. Clearly, marketing or advice from the industry is not going to fix what is the greatest weakness in the U.S. retirement system. The problem is just too great.
Nor are individual retirement accounts going to fill the gap. First, many low-income workers have enough difficulty covering their day-to-day expenses without thinking about retirement savings. They fear anything put aside for retirement will greatly weaken their budgets. No one is responsible for explaining the value of the tax deferral to them to make the idea palatable.
In addition, relatively little effort is being made to persuade proprietors of small companies to encourage their employees to use IRAs, or to help them do so; employers have little incentive to act. There is even less incentive for employers to contribute to simplified employee pension plans for their employees. Small-business owners are concerned about ERISA's fiduciary rules and possible administrative burdens.
Employers need a push
Clearly, it will take a push, possibly even a mandate, to get the employers of those 55 million workers to provide retirement plan coverage, as distasteful as that might be to many. The U.S. private retirement system has always been voluntary, and business and industry opposition helped sink the Mandatory Universal Private Pension System proposed in 1980 by President Jimmy E. Carter's Presidential Retirement Commission.
The country can no longer allow more than one-third of the workforce to go without retirement savings, especially with Social Security benefits likely to be cut around 2030. If the financial services industry and small-business owners do not want to deal with 50 different state plans, they should unite to push for a federal plan that, like the state plans, takes away virtually all of the burdens except enrollment from employers' shoulders.
Like many of the state plans, participation could be mandatory (as it is in a similar system in Australia) for any company that does not offer an equivalent or better plan, such as a 401(k).
The Department of Labor should work with the states, cities, the financial industry and small employers to design a standard package that would cover these workers with minimal disruption. A common standard would prevent companies from having to deal with different plans if they have operations in more than one state.
It's possible the Trump administration will try to block state plans as it has done with city programs, but it will find it has a long fight through the courts on its hands.
One way or another, 55 million American workers not now covered by a retirement plan must have the opportunity to get that coverage and start investing — whether by federal or state legislation. The financial advice industry should be part of the solution. What does it have to lose? It's not getting meaningful business from those 55 million workers now.