Nation's first retirement savings interstate pact opens pathway for more state auto-IRA programs

On Aug. 11, Colorado and Maine accomplished what many proponents of state-run retirement savings programs have long been waiting for: They formed the nation's first retirement savings interstate partnership, an arrangement that paves the way for other states to implement their own programs faster and more cost effectively.

Led by Colorado, the "partnership for a dignified retirement" looks to attract the retirement savings programs of small states that could benefit from the cost savings from economies of scale.

"There's always this question of how viable are these programs for smaller states," said Hunter Railey, the Denver-based director of the Colorado SecureSavings program, which launched in January and has accumulated more than $10 million in assets.

Railey explained that the Colorado program was designed with the idea of eventual partnerships in mind.

"The whole partnership concept was something that we embedded in the initial design of the SecureSavings program from the outset," he said. "Having it baked in created room for us to grow on the one hand and to reduce complexity for other states that would potentially be joining."

Maine, a state with an estimated 200,000 savers, jumped at the chance to partner with Colorado, said Elizabeth Bordowitz, the Augusta-based executive director of Maine's state-facilitated program, the Maine Retirement Investment Trust, or MERIT.

Directed to explore partnership opportunities, Bordowitz skipped going to the market with a request for proposal for a record keeper and went shopping for partnerships with large states, as envisioned in MERIT's enacting legislation.

"As a small state, I think it would have been unlikely that we would have done better than larger states in terms of the price points," Bordowitz said.

Bordowitz settled on Colorado after talking to virtually all the large states because it had "a firm and inviting vision of what the partnership would look like."

The MERIT program will launch broadly in early 2024, she said.

Both the Colorado SecureSavings and MERIT programs require employers with five or more employees to make the programs available to their workers if they don't offer a workplace retirement savings program themselves. Both programs are structured as auto IRAs, meaning workers are automatically enrolled in a payroll-deduction individual retirement account.

Maine and any other future states participating in the Colorado consortium will offer savers essentially the same program, including the same investment lineup made up of a target-date fund, money market fund and bond index fund managed by State Street Global Advisors and an international equity index fund managed by BlackRock. They will retain their own branding and state-specific program names.

To date, 15 states have established — or enacted legislation to establish — auto-IRA programs similar to those offered in Colorado and Maine. The initial states to offer the programs have been large states such as Oregon, Illinois and California that had a large enough population to hit economies of scale, but as smaller states now look to launch programs there's worry that their pool of workers won't be large enough to support a stand-alone program, according to industry observers.

Small states realize that they need to partner with another state because they may not have the size to make their programs economic, said Andrea Feirstein, founder and CEO of AKF Consulting Group in New York.

Indeed, several small states, including Delaware, Vermont, Nevada and Minnesota, are already in active conversations with Colorado to join its consortium, Railey said.

The main goal, he said, is to "drive some of the cost savings but also demonstrate that this is a viable policy for closing the retirement savings gap in a lot of states."

For public policy experts, the emergence of the nation's first interstate partnership marks a new chapter in the evolution of state auto-IRA programs.

"The prospect of actually having auto-IRA states band together to realize economies of scale and greater standardization is something that those of us involved in originating the state auto-IRA movement always hoped for," said Mark Iwry, non-resident senior fellow at the Brookings Institution in Washington and former senior adviser to the U.S. Secretary of the Treasury for national retirement and health policy.

Iwry noted that the advent of state partnerships helps achieve the "broad national breakthrough and coverage" that he has long pushed for through proposed legislation for a federal auto-IRA program, which Congress has considered since 2006 but hasn't yet been able to pass.

"If Congress won't do it," he said, "let the states do it."

States are well-positioned to achieve the national coverage that Congress has so far failed to achieve because state auto-IRA programs are fairly uniform, Iwry added. These are typically set up as Roth IRAs and require employers without workplace plans to participate in the programs or face penalties.

States that deviate from the norm, such as Maryland, which does not assess penalties on employers that fail to enroll in the mandated program, "are not going to be as much of a candidate for a partnership," Iwry said, comparing the situation to a high school prom.

"The weirder ones who are less like other kids have a harder time finding a date for the prom," he said.

To join the Colorado consortium, states must have similarly structured statutes, meaning they must be auto-IRA programs that automatically enroll workers at preset default savings and auto-escalation rates, unless the workers opt out. To be part of the consortium, the programs must be mandatory and impose penalties for employers that fail to register and enroll their workers in the program.

"These components do need to be in place," Railey said of the partnership requirements, explaining that participating state programs have "to scale in a way that's going to be financially viable for both the state, the vendor and consequently the partnership."

New Mexico, which signed a memorandum of cooperation with Colorado in 2021, for example, was unable to join the consortium because its program is voluntary.

"New Mexico is a fairly small state in terms of population, so without it being a required program, that's not something our vendor was willing to consider," Railey said, referring to Vestwell, the program's administrator.

New Mexico has attempted to amend its legislation to make the program mandatory for employers but has not been able to do so.

"We are considering available options that would allow the program to move forward," said Cindy Bryan, president of the board of the New Mexico Work and Save program, in a statement. Bryan was unable to give an estimate of the program's launch date.

Industry experts anticipate other partnerships led by large states to emerge.

"I think we'll see a handful but not a lot," AKF Consulting's Feirstein said, adding that there might be room for another two.

Iwry anticipates that new partnerships will be structured differently. They might, for example, offer different investment lineups or offer a uniform "public face."

Under a hypothetical alternate partnership structure, savers in Virginia could conceivably join, say, OregonSaves, if Oregon were to offer a formal partnership arrangement, Iwry said.

Still, Iwry expects the Colorado/Maine model to prevail, with the identity of individual programs within a partnership to remain state specific. Savers in Maine's MERIT program, he said, may not even know that "the Colorado people are involved."