State, local auto-IRA initiatives benefit ‘forgotten’ workers

In his short tenure, President Donald J. Trump has followed up on his campaign promise to try and reduce federal regulations. He has signed an executive order requiring that in order to add a new regulation, government agencies must get rid of two others at the same time. He has also targeted other regulations, such as Dodd-Frank and the Department of Labor fiduciary rule.

Two rules he should consider keeping are also from the DOL. The rules would encourage states and municipalities to create automatic-enrollment payroll-deduction IRA programs for private-sector workers by limiting their legal exposure under the Employment Retirement Income Security Act of 1974, known as ERISA.

Senate fate unclear

The House has already voted to kill the Obama-era rules, although their fate in the Senate is unclear. Mr. Trump has yet to make his intentions known, but if legislation makes it to his desk, the rules could be in jeopardy. That would be a shame because even those who oppose the rules acknowledge they are an attempt to address a serious problem in the American retirement system.

Currently, one in three workers — most of them working for small companies — do not have access to employer-sponsored retirement savings plans. Although they have the option to take advantage of individual retirement accounts on their own, most do not.

In response to this gap, at least five states have been working on legislation that would require employers who do not have their own retirement plan to withdraw savings from workers’ paychecks that would be directed to municipal or state-run savings programs. Employees would be automatically enrolled in the saving programs, although they could elect to opt out if they wanted.

Some lobbying organizations, including the Financial Services Institute Inc., the Investment Company Institute and the U.S. Chamber of Commerce, have criticized the initiatives. They claim the auto-IRA programs would create a patchwork of different retirement plans and subject investors to fewer protections.

Discontinue plans

FSI has argued that the programs would keep some employers from ever starting their own 401(k) plans and even tempt some that already do to discontinue their plans and offload their initiatives onto state and local government. If that were the case, financial advisers who have been advising employers on their retirement plans might be forced to leave a dwindling marketplace, FSI has argued.

No one is advocating that government take over what up to now has been a function of the private market. But an adviser can only advise an employer who is voluntarily willing to start a retirement savings plan. For one reason or another, many employers have shown they are just not interested in doing so.

(More: Advocates push to delay DOL fiduciary rule delay; industry waits for likely stall)

If government were to step in, it would get many, many more workers in the habit of saving for retirement. In the event that they switched jobs to an employer who offered a 401(k) plan, they would likely carry over that habit and become a member of their new employer’s plan. In the long run, that would be better for the employee, the adviser working for the plan sponsor and society overall.

Mr. Trump was elected largely on his promise to represent those in the American workforce who he said had been “forgotten.” Through these state and local programs, here is an opportunity to extend a hand to these workers and give them an opportunity to do what many other Americans have been doing for years: saving money for their golden years.