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Help from states desperately needed

The editors and publishers of Pensions & Investments have always believed that what is best for beneficiaries of retirement plans, whether defined benefit or defined contribution, is best for the financial services industry.

We have also believed that as many workers as possible should have access to a retirement plan. This is important for the financial health of retired workers, but it also contributes to the country's financial well-being by increasing the nation's saving rate.

For that reason, we have supported state efforts to set up state-sponsored private-sector retirement programs.

The nation cannot continue to allow more than 35% of full-time private-sector workers to go without a way to save for retirement in a tax-advantaged, low-cost plan other than an individual retirement account.

Individual retirement accounts are better than nothing, but inertia or lack of understanding of the need to save for retirement and the tax advantages of an IRA mean too many workers do not make use of them.

As many small employers cannot afford the cost or distraction of establishing and running defined contribution or defined benefit plans, and the federal government has failed to stimulate plans for employees of small companies, it has fallen to the states to try.

State-sponsored programs now are underway or in development in at least 10 states. Most require or encourage small employers to register their employees, providing enough information for IRA-like accounts to be established for each. The states or the private sector, in at least one case, administer the plans, saving the companies the burden and distraction. Another 20 states are likely to debate such proposals in 2019.

Details of the state plans differ. Most (not all) have default contribution and automatic escalation rates, and time will tell which is the best design. In the meantime, some states, especially smaller ones, are becoming interested in tapping into plans already established by the pioneering states, such as Oregon and California. It is heartening to see states looking for ways to collaborate and help private-sector employees save for retirement.

This should be encouraged. It is better to have a half a dozen plans with large numbers of employees than 50 plans with relatively small numbers of employees. The costs will be lower, and the largest and most efficient money managers and administrators likely will be hired to service the large plans.

The federal government could help stimulate the development of such plans, and their adoption by small employers, by reinstating the safe harbor from ERISA that was provided by the Obama administration.

But the establishment of such plans, even in all 50 states, will leave the task half done. The states must be prepared to promote the plans with advertising, brochures and educational materials like those provided by employers that have plans. They must contract with administrators who will track participants' balances and answer their questions. They must encourage workers to increase their deferral rates, or at least not decline to participate. Workers must be discouraged from withdrawing money from their accounts.

Further, states must campaign at the federal level to increase the contribution limits as the current IRA amounts are capped at far lower amounts than 401(k) limits, and are far from what's needed to help people save for retirement. In 2019, IRA contributions are capped at $6,000 a year, or $7,000 for those aged 50 and over. By comparison, workers covered by a company 401(k) plan can sock away up to $19,000 a year, with another $6,000 in catch-up contributions for employees aged 50 and over.

It may not be politically possible to increase the secure choice plan deferral amounts to the 401(k) level in one congressional action, but efforts should be made over a few years.

All will benefit, especially workers currently without a retirement saving vehicle.