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.”