Digital plan providers see opportunity in state mandates

Digital plan providers looking for business see a big door opening as more states implement retirement programs that get tough on employers lacking workplace savings plans.

Because the new state-run plans require employers not offering retirement plans to make the state plans available to their workers or face penalties, employers now must make a choice: Should they go with the state offering or provide something else?

"What they're doing is they are driving people to make a decision," said Chad Parks, the San Francisco-based founder and CEO of $2.8 billion Ubiquity Retirement + Savings, about the state-mandated programs. "Small businesses are being forced to do their research and to look into what alternatives might be available."

As employers weigh their options, plan providers are feeling more and more upbeat. Many report increased business activity in states where deadlines for registering for the state-mandated programs have kicked in. Digital plan providers such as Guideline Inc., Ubiquity, Betterment for Business LLC, Human Interest Inc. and SaveDay Inc. say business has increased in part due to state-mandated plans.

"We definitely have seen an uptick in the adoption of our program in those states since we've started messaging," said Kristen Carlisle, New York-based general manager of Betterment's 401(k) business, which had $1.4 billion in pension and profit-sharing plan assets as of May 14, according to its latest Form ADV.

New plans on Betterment's platform within the 10 states it's targeting are up 88% in 2021 from the number of new plans in those states in all of 2020, Ms. Carlisle said. She declined to disclose the actual number of new plans that joined the platform this year.

Some 13 states and two cities to date have authorized state-facilitated retirement savings programs for private-sectors workers with at least 33 other states having enacted — or planning to enact — legislation to establish them, according to a report published May 15 by Georgetown University's Center for Retirement Initiatives. Most of the programs in place are structured as payroll-deduction individual retirement account programs, or "auto IRAs," that employers are required to make available to their employees if they don't offer a retirement plan themselves.

As the number of new plans inch higher in states with legislation mandating retirement plans, private-sector providers have breathed a sigh of relief. Some worried that the new state-run plans might cut into their business or, worse, cause employers to drop their retirement plans in favor of the new state options, fears that for now seem unfounded.

Instead, the new state mandates appear to be spurring employers to adopt their own plans. In an analysis of nearly 655,000 retirement plan Form 5500 filings from 2013 to 2019, Pew Charitable Trusts found that state auto-IRA programs seem to complement the private market for retirement plans.

The non-profit found that in Illinois, Oregon and California — the three states that have begun enrolling private-sector workers into their auto-IRA retirement programs — employers with retirement plans continue to offer them and those without plans are adopting new ones at similar or higher rates than before the state programs started.

New plans as a percentage of existing plans nationwide climbed 2 percentage points to nearly 8% in 2019 from roughly 6% in 2013 when state-run retirement programs were not around, Pew found in its analysis.

New plan formation in Illinois, Oregon and California showed a similar trend with the proportion of new plans holding steady or increasing in each. In 2019, new plans in Oregon and California grew by 10% and 9%, respectively, posting some of the highest proportions of new plan adoptions. In Illinois, new plans as a percentage of existing plans grew by 7%, slightly lower than the national average of 7.6%.

While the uptick is encouraging, some plan providers say it’s still early days in terms of raising awareness of the new state mandates among employers, particularly those running super small businesses.

Ubiquity’s Mr. Parks, for instance, believes that small businesses with five to 50 employees are still largely unaware of mandates in their states because they haven’t received as much information as larger employers, which have already hit deadlines to register for the state plans.

It’s not until business owners “sit down to do their taxes with their CPAs” and learn of the penalty for not having a retirement plan that “they all start to really pay attention,” Mr. Parks said, explaining that these small businesses account for most employers without plans.

Still, plan providers are ramping up their marketing and outreach efforts in a bid to position their offerings vs. the state plans in a positive light. Some emphasize the lack of tax deferral benefits in the state plans, which are typically structured as a payroll-deduction Roth IRA.

“Most employees want the tax deferral the 401(k) offers,” said James Merrill, business development officer at SaveDay in Austin, Texas.

Others note that while the state programs cost employers nothing, the cost to participants is high.

“Their best efforts to minimize cost to the businesses is a little bit askew with where the industry has gone in terms of lowering the cost to the employees,” Mr. Parks said, noting that employees in state plans can pay asset fees of up to 100 basis points.
“100 basis points is rather expensive for an employee these days,” he said.

Oregon’s state-sponsored retirement program — OregonSaves — charges participants an annual asset-based fee of about 1%, while California’s CalSavers’ program charges an annual asset-based fee of 0.825% to 0.95% depending on the participant’s investment choice. Illinois Secure Choice program is the least expensive of the three, charging participants an annual asset-based fee of about 0.75%.

“These are not inexpensive plans to the employee,” SaveDay’s Mr. Merrill said. In marketing its 401(k) plan, SaveDay emphasizes the company’s all-in annual plan fee of about 0.45%, which it charges participants. Employers do not pay anything for the plan.

Other digital providers, in contrast, typically charge employers a fixed monthly base fee, along with per-participant fee paid by either the employer or participant. They sometimes also charge an investment fee to either the employer or participant. Human Interest, for instance, charges 0.5%, while Betterment charges 0.25%.

The state plans, however, compare favorably with 401(k) plans overall. On average, small 401(k) retirement plans with 100 participants and $5 million in assets cost 1.2%, while large plans with 1,000 participants and $50 million in assets cost 0.9%, according to the latest edition of the 401(k) Averages Book.

“The people who are doing the best job for us at SaveDay at bringing us new clients are the states,” Mr. Merrill said, noting that employers dissatisfied with their state’s retirement plan options have reached out to SaveDay for information.

In some instances, he said, employers reported having unwittingly upset workers when they noticed their reduced paychecks, a result of the automatic-enrollment feature of the state plans.

“When they see a change on their paycheck, even if they’ve received emails and warnings, they didn’t always understand what was happening,” Mr. Merrill said.

SaveDay gives employers the choice of having employees opt into the plan rather than be automatically enrolled in the program as the state plans do by default.
With so many factors to consider, private-sector plan providers are focusing their efforts on helping employers better understand their choices.

“We want to make sure that we’re educating people in places that have these mandates about what’s going on,” said Eric Phillips, the San Francisco-based director of financial partnerships at $1 billion-plus Human Interest. The digital record keeper, for example, created a learning center on its website to help employers understand the differences between state-run plans and those offered by Human Interest.

Betterment for Business, too, is providing information in states that have plans through “targeted campaigns for employers” using the company’s blog, LinkedIn and other media, Ms. Carlisle said.

Ubiquity’s Mr. Parks, meanwhile, is marketing directly to employers as well as through strategic partnerships with payroll providers, certified public accountants and other benefit providers that serve small businesses.

Plan providers report that interest in their plans has grown as they’ve bolstered their outreach.

“We’re seeing a lot more engagement from these employers as they’re thinking about what options make sense for their business,” Ms. Carlisle said.