State-Run Retirement Security Program Challenges
posted by Fisher 401(k) October 8, 2018
Several states have launched programs to help citizens prepare for retirement in recent years, but some have encountered tough blocks on the road to building their own solutions to the ever-widening retirement gap in America. Connecticut, California, and Iowa have been actively pursuing Secure Choice models for state-run IRA programs, but each state has had its efforts stalled by a myriad of challenges from the federal government, from the complexity of the issues, and even from dissenting public opinions on the government’s role in the retirement marketplace.
Retiring in Connecticut: Slow, Steady Progress
The Connecticut state legislature paved the way for a state-run IRA program with Public Act 16-29 in 2016. This bill passed in an effort to support the nearly 600,000 private-sector employees in the state without access to employer-sponsored retirement savings.1 Joseph Fazzino, a member of the board tasked with creating the program, said about the need for state intervention:
“The retirement savings crisis in America is a real one. The Boston College Center for Retirement Research has estimated that there is a $7 trillion gap between the funds necessary for a comfortable retirement for Americans and the retirement funds that they have saved. The average retirement savings for American households approaching retirement is a mere $12,000.”2
As outlined by the law calling for its creation, Connecticut’s program is a state-run auto IRA with automatic enrollment for the employees of businesses who participate. Unlike many other states’ programs, Connecticut’s authority is not paid for with tax dollars, but through contracts with private-sector companies. It was in the creation of this authority model that the state first ran into troubles leading up to its mandated January 1, 2018 launch. A quorum of board members was found by early 2017, but the board lacked a qualified chair to call its first meeting and begin its work in earnest.3
In late 2017, the authority voted to defer the program’s launch date in order to give them more time to develop plans.4 In January 2018 the authority began their search for an executive director of the program ,and current plans to roll out the program are on hold.5
California Secure Choice: Legal Challenges to Launch
California’s approach is part of the recent wave of states adopting “Secure Choice” model legislature. Though they were early adopters, the state has been working two years to launch their California secure choice state-run IRA, dubbed CalSavers, which features automatic enrollment at a saving rate of 3% for employees who don’t choose to opt out.
As we wrote in June 2017, California saw its first major opposition come in the form of the Trump administration’s repeal of a Department of Labor (DOL) rule, which provided guidance for the creation of Secure Choice programs at a state level.
The latest challenge to CalSavers has arisen in the form of a lawsuit made against California Treasurer John Chiang and members of the CalSavers investment board.6 In the suit, the Howard Jarvis Taxpayers Association points to the repeal of the Obama-era DOL rule, which extended Employee Retirement Income Security Act (ERISA) protections to state-run retirement plans, as a major cause for concern.7 The suit calls for CalSavers to be voided on the grounds that, without the employee protections afforded by ERISA, the state’s program would be in violation of ERISA and therefore illegal at a federal level.8 State officials have asked that the suit be thrown out.9
Only time will tell how this case turns out, but it could have significant implications not just for California, but for any other state which has launched or is considering similar Secure Choice programs of their own.
Iowa Retirement: Searching for Compromise
Leadership in Iowa has known for years that there is a retirement crisis facing its workers. Treasurer Michael Fitzgerald has taken up the retirement gap as a focus for his work at the state level, saying, “There are so many people out there relying on nothing, people approaching retirement age with $5,000, $10,000 saved. That’s a crisis.”10
Because more than one-sixth of Iowa’s workforce does not have access to retirement plans through work, Fitzgerald has spent the last three years rallying state lawmakers to address this problem. Iowa was one of the first states to introduce legislation for a state-run retirement program in 2016, but has so far been unsuccessful in their attempts to move forward owing largely to financial industry dissent and lobbying.11 Each year since 2016, lawmakers have introduced new bills, with increasing support from around the state. The latest bill introduced in 2018 by State Sen. Nate Boulton has the support of the AARP, the Iowa State Treasurer’s office, and Iowa Professional Firefighters.12
As these states and others across the U.S. continue to work to protect their citizens’ rights to save for retirement, we will keep you updated on the progress. What happens in these states over the next several months could set the tone for new state retirement systems for years to come.
In the meantime, small business owners living in these states do not have to wait for the dust to settle in order to empower their employees towards a secure retirement. There are many good reasons to start a small business 401(k) plan, from tax benefits to extra resources for attracting and retaining employees in a tight job market.