One approach being considered by various states is the Secure Choice Pension proposed by NCPERS. Modeled after cash balance plans, with voluntary contributions to a public/private partnership, it calls for states to set up boards and administrators for professionally managed plans with diversified portfolios. Participation would be voluntary and benefits would be portable.
The first state to put the concept into play was California, which in 2012 enacted legislation creating a state-sponsored IRA funded through payroll deductions at businesses with five or more employees that do not offer retirement plans. Employees will default into the California Secure Choice Retirement Savings Program system but can opt out; workers who have retirement coverage can participate voluntarily.
Dan Reeves, chief of staff to the bill's co-sponsor, California state Sen. Kevin de Leon, said that after five years of laying the groundwork, “we learned a lot of lessons” on what legislation would pass. One key accommodation was making it work more like an IRA, avoiding an employer contribution that would subject employers or other fiduciaries to the Employee Retirement Income Security Act. That helped lessen opposition from the employer community, but many in the financial services and retirement provider industry are still resistant to what they see as direct competition Mr. Reeves said.
Following a market and feasibility study expected by the end of this year, the next step will be final legislative approval to start the system under a board convened by Gov. Jerry Brown, “which I hope won't be as controversial as the first round,” said Mr. Reeves. “I think some of the (financial) firms are coming around. We are trying to create a market where one doesn't exist today.”
The California experience is expected to provide a critical blueprint for other states. “You want to make sure you get it right, and you have a clearly thought-out plan,” said Mr. Reeves.
Another test case is underway in Massachusetts, which in 2012 enacted legislation calling for the state treasurer to create a state-sponsored defined contribution plan for non-profit organizations with 20 or fewer employees, now awaiting approval from the Internal Revenue Service as a qualified tax-deferred plan.
In Connecticut, legislators approved funding May 7 to create a board and conduct a feasibility study aimed at having a program in place by 2016.
In Illinois, the state Senate agreed to move forward with a retirement savings plan for businesses with 25 employees or more.
In Oregon, a newly appointed task force will make its recommendations to the state Legislature in September. Colorado also has formed a task force.
While some state legislatures held hearings but have since adjourned without taking further action, others still are debating proposals largely modeled after California's.
The basic concept is often compared to the 529 college savings plan model. Launched by a 1996 tax code change that prompted states to offer them, the 63 largest 529 plans, representing 98% of the market, now have $193 billion in assets and several recent years of double-digit growth, according to Chicago-based Morningstar Inc.
“It may take some interesting and creative thinking,” said Diane Oakley, executive director of the National Institute on Retirement Security in Washington. “The real issue is finding a way to do it in a cost-effective way, so the vendor has enough time to get to scale.”
Mr. Kim of NCPERS is encouraged by the response to the California board's request for information on plan design and investment options from firms including TIAA-CREF and Prudential Retirement, and input from firms like BlackRock Inc. at a Secure Choice symposium this March. “They are beginning to see a market,” he said.
“Financial firms are recognizing that there is a problem and a business opportunity,” said John Adler, retirement security campaign director for the Service Employees International Union, Washington. “If a lot of states get into this, there will be pressure on (the federal government) to get involved, like they did with (changing the tax code to allow) 529s. At the end of the day, someone is going to manage that money.”