States pushing to offer retirement accounts to private sector

Expanding the public retirement system to the private sector moved to political reality from abstract concept this year, as 16 states either are considering legislation or taking the first steps toward implementing new approaches.

The amount of attention at the state level in 2014 is encouraging, said Hank Kim, executive director and counsel of the National Conference on Public Employee Retirement Systems in Washington. “Policymakers are seeing the light and recognizing that they have to do something. I think they see a crescendo building and that they have cover. As states start adopting this, the growth will come,” said Mr. Kim. “I think 2015 is going to be a big year.”

“With 75 million Americans without a retirement plan, there is no question that our country has a retirement security crisis,” said Sen. Tom Harkin, D-Iowa, in an e-mail. “I am encouraged to see states taking steps to improve retirement outcomes for Americans.” Mr. Harkin has proposed privately run retirement funds on the national level.

Like the “MyRA” retirement savings bond program announced in January by President Barack Obama that will start rolling out next year, states are experimenting with ideas to help more people gain access to workplace retirement savings programs without adding more burdens on employers. The basic concept is similar to individual retirement accounts on the contribution side, but more like public defined benefit or defined contribution plans when it comes to pooling of assets, managing risks and providing retirement income.

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.”

Rocky Joyner, vice president and actuary with the Segal Group in Atlanta, said that state proponents of a public/private retirement system “are starting to get some traction” on how few people have access to employer-provided retirement plans.

“If you look at the data, it's sorely needed. We need to make it easier for people, not harder. The workplace access is the initial key,” said Mr. Joyner, who recently consulted with a Maryland gubernatorial task force on the issue. “Then you start to talk about benefit adequacy. I think it's headed toward more robust DC-type plans that have elements of required or strongly encouraged annuitization.”

Having the states blaze the trail makes sense, said Teresa Ghilarducci, an economics professor with the New School for Social Research, New York, who also noted that states also were early adopters of what became Social Security. “With American social policy, especially retirement, the federal government never moves first,” said Ms. Ghilarducci. She frequently consults with governors, legislators, mayors and treasurers, all worried about footing the bill for older residents unprepared for retirement, and mindful of growing public alarm over retirement insecurity. “Every politician can read the polls,” she said.

“It's an incredible liability for the state,” agreed Mr. Reeves of California, where 47% of workers are projected to retire with income below the federal poverty level. “If this tidal wave of retirees comes at us, I don't know how we are going to cope. And I think every state has this problem.”

David Madland, director of the American Worker Project at the Center for American Progress in Washington, a progressive think tank, is encouraged that preventing that tidal wave is a bipartisan issue in many states. “Both parties recognized that this is a problem. That gives me a lot of hope,” he said. “Congress isn't taking action, so states have to.”

Ms. Ghilarducci said politicians also want to be smart shoppers. “Every New Yorker knows you should never buy retail. You get lower fees, you get a higher rate of return because you have pooled assets, you have a diversified portfolio and you get a partial annuity at the end,” she said, noting the added benefit of getting more people into the retirement savings habit. “Your young self may not like it, but your older self will appreciate it.”