State retirement programs like the ones being established in California and Maryland may, at first blush, seem to pose competition for 401(k) advisers.
After all, the programs would seemingly take away potential client prospects. Aside from facilitating payroll deduction into the state-run retirement plans, employers would largely be hands-off, thereby not requiring the services of a plan adviser.
However, the programs — known as auto-IRAs, because employees are automatically enrolled into individual retirement accounts — don't pose a threat, and could benefit the businesses of 401(k) advisers over the short and long term.
Five states — Illinois, Oregon, Connecticut and the two aforementioned states — have passed legislation creating such auto-IRAs for the private sector, which would mainly benefit employees at small businesses that don't offer a workplace retirement plan.
The laws mandate employers with a certain number of employees to offer a retirement plan, whether a private-market product such as a 401(k) or the state-run auto-IRA.
That mandate serves as a distribution opportunity for advisers because it expands the pool of employers that may offer a 401(k) plan, according to Andy Remo, the director of legislative affairs for the National Association of Plan Advisors.
'NEW MARKET OPPORTUNITY'
“Small plans are sold, they're not bought. All of a sudden if you have a requirement for a business to do something, you have a new market opportunity you can take advantage of,” Mr. Remo said.
NAPA believes the requirement for employers to adopt some sort of retirement plan is the most important policy consideration for any states thinking of developing auto-IRA programs, Mr. Remo said.
In 2016, auto-IRA legislation was
introduced in several states including New York, Pennsylvania, Colorado, Utah, Arizona, Michigan and Rhode Island.
The Department of Labor this year
issued a final rule promoting states' establishment of such programs, in a move to help reduce the coverage gap. It issued a
similar rule for city programs in December.
“I think if advisers really think it through, and these laws have an enforceable mandate to them, there's a lot of opportunity there,” Mr. Remo said.
Aaron Pottichen, the retirement services practice leader at CLS Partners, said he doesn't view the state plans as competition for advisers.
“I think the companies that will end up using those will be the companies that wouldn't care to open up a 401(k) plan to begin with, because they have an employee base that is high-turnover, or they're a small employer that doesn't want to deal with the administrative hassles of a 401(k),” said Mr. Pottichen, who's based in Austin, Texas.
Even if a small employer were to select the state-run plan as opposed to a 401(k) or other private option, advisers could eventually convince employers to adopt a 401(k) once they're acclimated to the concept of deducting the retirement savings from employees' paychecks.
“It's about getting employers into the system, and once they're in and used to using it, you can get them into more robust plans, because it sort of takes the fear of the unknown out of it,” Mr. Remo said.
Susan Shoemaker, a partner at Plante Moran Financial Advisors, believes the auto-IRAs would, if anything, “probably be positive instead of negative.”
She believes the positive effects would largely be felt by advisers and brokers focused on small and start-up plans.
LEAKAGE FEAR
Some groups such as the Financial Services Institute Inc., which represents independent broker-dealers, are opposed to the auto-IRA programs.
That's due in part to a leakage fear whereby employers ditch their current 401(k) plan for a state option if they're perceived as more manageable, according to Michelle Carroll, the director of state legislative affairs.
However, some disagree with that contention.
“I don't think employers that have had 401(k) plans all these years will all of a sudden move to auto-IRAs,” according to Ms. Shoemaker, who's based in Southfield, Mich.
An employer survey conducted in Connecticut largely bears out this theory — of those who currently offer a workplace retirement plan,
only 1% said they would drop it for the state program.
Many employers view their 401(k)s as a competitive benefit for employees, Ms. Shoemaker said. The auto-IRA programs legislated to date don't allow for employer matches, an important part of that benefit. Some of Ms. Shoemaker's clients have ultimately increased their 401(k) matches after employees complained they were too measly.
Further, employers may see 401(k)s as a better avenue than IRAs to help their employees achieve financial security, because the federal contribution limit in IRAs is much lower than 401(k)s, Ms. Shoemaker said.
