With more than half of the states considering retirement savings programs for eligible private-sector workers, the next challenge is to build them, from operations to investment menus.
Setting up the investment part of the equation won't be quick, industry sources said. But state-run retirement savings plans do have something of a road map: the growth path of 529 college savings plans, the investment vehicle to which they most often are compared.
Such plans have notched impressive growth, reaching $232 billion this year, according to Morningstar Inc., Chicago. And as college savings plans mature, their governing boards have become more comfortable with the idea of expanding fund lineups and asset allocations beyond their original, conservative offerings.
As much as half of all 529 plan dollars go to age-based programs today, including target-date strategies, consultants said.
The learning curve has brought more cost efficiency as the programs spur more competition from investment managers. Richard Mourdock, former Indiana treasurer, noted that after the state rebooted its 529 plan, costs dropped by two-thirds.
“The private sector can be pretty darn innovative,” he said at a recent seminar hosted by Georgetown University's Center for Retirement Initiatives in Washington.
Now, as some state officials start building savings programs for private-sector workers, which are aimed at those without access to an employer-offered plan, they are in a good position to offer creative solutions.
“States have more to invest and know more about investing than most individuals,” said Joshua Gotbaum, a Brookings Institution guest scholar and member of the Commission on Maryland Retirement Security and Savings that led to that state's secure choice program. “They could use their buying power to demand better retirement products. You or I can't demand a fund that's part mutual fund and part annuity, but a state could. By being smart investors, states could improve retirement security for all of us.”
A conservative approach
Similar to 529 plans in their early days, state private-sector retirement programs now being launched are expected to start out conservatively. In California, officials are constrained by statute to invest plan assets in U.S. Treasuries for up to three years, or until the program is fully developed.
Connecticut's statute calls for participants to be automatically enrolled in Roth individual retirement accounts in age-appropriate target-date funds, which can be offered through multiple vendors, and Maryland's secure choice legislation requires that multiple options be offered.
One of the first movers, the Oregon Retirement Savings Board, has been meeting with plan service providers and consultants to get their perspectives on everything from technology and member servicing to investments.
“We've gotten very good engagement and a lot of good input,” said Lisa Massena, executive director of the Oregon Retirement Savings Board, who noted that the enabling legislation, approved in 2015, had a broad but vague mandate to offer “appropriate” investments.
“The board still needs to set an investment policy, but I imagine it will be the concept of, "first, do no harm,'” Ms. Massena said. “From the beginning, there's been a concept that target-date funds would be part of it. It makes sense to also offer a capital preservation fund, and maybe a way (for participants) to save and grow their savings, if they want to take a little bit of risk.”
The board is preparing a September bid package for plan service providers with the goal of having a plan in place by the end of the year and at least a pilot group enrolled by July 1, 2017. “We are working to leverage the best practices that exist already. A lot of this is well-trod ground,” she said.
In Illinois, an investment manager will be hired by December to help the Illinois Secure Choice Board develop an investment framework for its auto-enrollment, payroll-deducted retirement savings account that will start enrolling applicable employees in June 2017 at 3% of salary.
With fees capped at 75 basis points, including record keeping, “there is strong interest in more passively managed” options, said Illinois Treasurer and board Chairman Michael Frerichs, who as the state's chief investment officer manages $25 billion, including $8 billion in college savings plans.
Some state officials involved in developing programs are seeing financial and retirement services firms turn into potential partners from staunch opponents.
“The financial services industry has been very helpful. We definitely see various glidepaths going forward,” said Christina Elliott, acting director of California's Secure Choice program.
Market analysis conducted by Boston College for the Connecticut Retirement Security Board found that uncovered workers were more likely to have lower income and fewer years of formal education.
“Because this population of workers is largely unserved by the financial sector and many lack financial literacy, their needs will be different from what you see with typical 401(k) participants,” said Connecticut Comptroller Kevin Lembo. “That's why the board recommended the program only offer one investment option in the form of an age-appropriate target-date fund, which is also one of the lower cost investment options, particularly for small dollar accounts.”
“In many cases, this will be their first investment vehicle,” said Mr. Frerichs of Illinois. “As with a lot of things, it needs some fine tuning.”
In California, “the thing that the board has been very, very clear on is, keep it simple,” said Ms. Elliott.
Ms. Massena of Oregon agrees. “We now understand that over time (having) a lot of investment choices does not make good investment decisions. Now, we make it even simpler.” Still, she added, as they mature, “it is important that these programs have access to the same types of vehicles (in other savings plans). We are actively exploring that just to make sure.”
Eye on the prize
Providers will need patience, but the potential payoff is impressive. California's most conservative projection has 1 million to 2 million enrolled in the program's first full year. Oregon officials project that as many as 70% of the 600,000 workers whose employers do not offer plans will participate in the auto-enrollment, auto-escalation program.
“In Oregon, the board has been committed to a couple of things: as quickly as we can, (make sure)the person is in an age-based fund, and our starting savings rate is 5%. That can make a pretty big difference for participants and the program, and those two things in combo are pretty important,” said Ms. Massena.
“Not all states are looking to do the same thing,” noted Bennett Kleinberg, vice president of innovation for Prudential Retirement's investments business, in Hartford, Conn.
“The enabling legislation is critical,'' Mr. Kleinberg said. “As a fundamental question, the states are going to have figure out whether they are going to use registered mutual funds or use something developed only for the plan. From our perspective, we are willing to work with the industry and the SEC to what extent that is possible. We eagerly await more conversations with the states.” n
This article originally appeared in the September 19, 2016 print issue as, "States start hard work on private-sector savings efforts".