What a federal auto IRA could mean for state programs and PEPs

A potential federal mandate for retirement plan coverage is looming — and that could prod more states to implement their own auto IRA programs, according to a report Wednesday from a consultant.

A federal mandate could also mean a lot of business for small 401(k) providers and pooled employer plans, some of which have already seen surges in new clients in states with mandatory plan coverage.

Currently, three states have live auto IRAs — Oregon, Illinois and California — and two other states have voluntary programs. Those include a multiple employer plan in Massachusetts and a plan marketplace in Washington. By the end of the year, Connecticut will likely launch its auto IRA, and programs in Vermont and Maryland are expected to roll out early next year, according to AKF Consulting, which published a report Wednesday on state retirement initiatives.

“Federal legislation, if passed, promises to make [state-run retirement programs] more attractive and to make their implementation more urgent,” AKF wrote.

The group points to a federal universal savings initiative within the Budget Reconciliation Act that would require employers to provide retirement plans or IRAs to their workers.

“Importantly, the proposal includes a grandfather provision that states should pay particular attention to. Under this provision, any [state-run retirement program] that is statutorily established prior to enactment of the proposed bill will automatically satisfy the mandate,” the report noted. “We believe the incentive is clear: any state that is committed to creating a solution to the impending retirement crisis should take the steps to establish a program now.”

An expansion in state auto IRAs — especially the launch of a federal program — could mean big business for pooled plan providers that offer PEPs.

This year, dozens of entities have registered with the Department of Labor as pooled plan providers, and some have brought their plans to market. One provider, Paychex, reports having added thousands of businesses to its PEP, with more than half of all new clients opting for that plan. Uptake has been strong in the states that have auto IRA programs, according to the company.

Coverage mandates are seen as a powerful way for 401(k) and PEPs providers to market their services as an alternative to the option from the government.

It’s even an option that states might consider, according to AKF.

“[W]ould a state need to qualify as a PPP or could it engage a registered PPP on its behalf? Even more important, can a state launch a PEP and market to or otherwise enroll employers from other states?” the report asked.

Currently, state-run plans have amassed about $344 million across more than 400,000 accounts, according to data from Georgetown University’s Center for Retirement Initiatives that were cited in the report.

Among programs that have launched or been enacted, 11 are automatic IRAs, one is a voluntary IRA, two are multiple employer plans and two are plan marketplaces, the report noted.

The market is starting to attract new entrants, including BNY, whose Sumday subsidiary is taking over next month as program administrator for Oregon’s plan, replacing Ascensus Government Savings. Sumday will also be the administrator for Connecticut’s program, the report noted. Sumday partners with Vestwell on plan record keeping.

A recent change made by two of the existing state auto-IRA programs is a quicker shift of account holders’ assets into target-date funds, according to the AKF report. Previously, California and Oregon didn't put participants into target-date funds until they had saved $1,000. California now automatically moves savings out of money market funds after 30 days, while Oregon will soon be making a similar move for participants after 90 days.