The Financial Services Institute, which represents independent broker-dealers and financial advisers, will focus its lobbying efforts next year on preventing states from rolling out automatic retirement savings programs.
Earlier this month, the Illinois legislature passed a bill that would require companies with 25 or more employees that do not have their own retirement plan to set up an automatic-enrollment individual retirement account administered by the state.
The advance of the auto IRA in Illinois comes as Congress has not been able to move similar legislation, even as worries grow about retirement security for aging baby boomers.
Having states involved in retirement savings
squeezes out financial advisers, said David Bellaire, executive vice president and general counsel at the FSI.
“We see this as unnecessary, unwise competition against small [financial advisers] that are working hard to address these needs,” Mr. Bellaire said. “There's significant research that shows that investors, particularly those that are planning for retirement, have better outcomes when they work with financial advisers.”
The FSI will work to discourage other states from following Illinois' lead.
“On the state level, we have no higher priority,” Mr. Bellaire said.
A financial planner in Illinois doesn’t see his state’s auto IRA initiative as competition. James Karabas, district branch manager at Waddell and Reed, said the state program won’t give employees comprehensive financial guidance, just a starter IRA.
“I don’t think it’s a threat,” Mr. Karabas said. “I can advise [a worker] on the whole wealth management picture. That is a personalized, relationship-type service that the state would never be able to provide.”
The FSI's worries are misplaced, said Karen Friedman, executive vice president of the Pension Rights Center.
The state-level savings programs might enhance the market for investment advice, as more people begin to build a nest egg, she said.
“There's still going to be room for good advice,” Ms. Friedman said. “What it's meant to do is get people to save.”
The auto IRA may wind up generating investment-advice clients, as they get into the habit of saving for retirement.
“Once they have money saved up, they’ll want to do more planning,” Mr. Karabas said. “That would be good for our business.”
With the stasis at the federal level,
several other states have eyed private-sector savings plans and conducted studies, but have not gone as far as Illinois.
“Illinois is the first state to make the full jump into a state-administered plan,” Ms. Friedman said. “A lot of state legislatures around the country are going to be looking at Illinois to see how it works.”
They may also be grateful to Illinois for taking the initial risk.
“The question with each state is: Should we be first?” said Judy Miller, director of retirement policy at the American Society of Pension Professionals and Actuaries. “Now someone is first. That's one less obstacle for other states.”
The author of the Illinois bill hopes it shines a light on the part of the American workforce — about half — whose employers don't offer retirement plans.
“People who don't have access to employer-sponsored plans are just not saving money,” said Illinois State Sen. Daniel Biss, D-Evanston. “To be the first state in the country to pass legislation like this I hope will help start more conversations around the country that will put retirement security where it belongs, which is on the map of policy questions that need to be answered if we're going to have a thriving middle class.”
Under the Illinois plan, workers would have a 3% payroll deduction per paycheck that's deposited into the savings instrument. They can choose to opt out.
Neither the employer nor the state would contribute money or have fiduciary liability.
The Illinois program won't take effect immediately. It will officially become law next June and be implemented over a two-year period.
The state will set up a seven-member board to manage the program. The board will select one or multiple investment managers and create a target-date fund and up to four other funds.
After problems Illinois has experience with its 529 college savings plan, Mr. Karabas is lowering his expectations for the auto IRA.
“My confidence in the state managing the assets would be a concern for me, if I were an employee involved in one of these auto IRAs,” Mr. Karabas said.
