State auto-IRA programs were dealt a blow last week, when the Senate
voted to overturn an Obama-era rule that promoted creation of these retirement plans.
President Donald J. Trump is now poised to sign away the Labor Department rule. Observers expect this will chill progress among some of the states considering an auto-IRA program.
Proponents of the rule and state-level action to build these automatic-enrollment, payroll-deduction retirement programs point to one overarching fact: Roughly a third of Americans don't have access to a workplace retirement plan, a proportion that has remained stagnant for years. They argue that in the absence of a better idea, why shouldn't states be encouraged to promote more retirement savings?
To be fair to detractors: Yes, these plans have their flaws. As Aron Szapiro, director of policy research at Morningstar Inc. pointed out to me, these auto-IRA programs may further fragment retirement savings, through the existence of several small Roth IRAs that aren't allowed to be rolled into a Roth 401(k) down the road if a worker switches jobs. And, some workers auto-enrolled into these Roth IRAs wouldn't be eligible to make such contributions, due to income limits on Roth IRAs, for example. That could lead to potential headaches for investors if they then have to undo this mistake, Mr. Szapiro said.
But he added that these are all fixable problems.
Some of the more outspoken critics don't readily point to these items. Rather, congressional Republicans and financial industry groups such as the Investment Company Institute, Insured Retirement Institute and Financial Services Institute Inc. say these plans will reduce investor protections, provide a competitive advantage over the private sector and lead to a patchwork of plans nationally.
Some of these arguments appear a bit flimsy upon closer examination.
Let's first look at the notion of investor protection. The DOL regulation Congress recently voted to overturn
offers guidelines for how states can skirt the Employee Retirement Income Security Act of 1974 when setting up auto-IRA programs. Opponents say not being subject to ERISA equates to fewer protections for employees. However, there are investor protections already in place through various state laws as well as tax and securities rules governing IRAs, which are different from ERISA protections but not necessarily lax. By extension, would opponents argue that all IRA investors are currently at risk? I don't believe so.
Further, ERISA doesn't currently cover all employer-sponsored plans. There are non-ERISA defined-contribution plans, for example, like governmental 457 plans and some 403(b) plans. The federal Thrift Savings Plan, the nation's largest DC plan, isn't governed by ERISA. Are opponents insinuating that investors in these plans are at risk?
The ERISA argument also contradicts one being used by some of the same players — ICI, IRI, FSI and many Republicans in Congress — in a separate fight: the one against the DOL's fiduciary rule. In that fight, opponents argue ERISA fiduciary protections should not extend to IRA investors.
The competition argument is also a bit strange, because evidence seems to point to auto-IRA programs being a boon for the business of these trade groups and their members.
States implementing these programs — California, Connecticut, Illinois, Maryland and Oregon — aren't requiring employers without a workplace plan to offer an auto-IRA. They're mandating that employers of a certain size offer some sort of plan, which could be a 401(k) or other private-sector option.
John Scott, director of retirement savings at The Pew Charitable Trusts, pointed out that nearly 300,000 employers would, in theory, be affected by the auto-IRA program being implemented in California alone. Even if a small percentage of them set up a 401(k), that would be "a huge number," he said.
"If automatic enrollment at the federal level or in a state made it easier to successfully market 401(k)s to even one out of five or one out of 10 of the small employers that don't currently have those plans, that would be one of the biggest expansions of 401(k) coverage that we've ever had," said Mark Iwry, a non-resident senior fellow at the Brookings Institution and former senior adviser to the Secretary of the Treasury during the Obama administration.
Of course, there's also the argument that non-ERISA status of IRAs would cause employers to ditch their 401(k)s to offload risk and responsibility. But would a large number of employers want to take a key benefit away from their employees, involving the loss of an employer match and other employer contributions, as well as the higher contribution limits of 401(k)s compared to IRAs? It seems unlikely.
The Pew Charitable Trusts
surveyed small employers on this point, and found 13% of businesses that already have a plan would drop their current plan for the state's.
And are industry opponents considering this?: Workers who save in an auto-IRA in the short term would build up savings that would likely find their way to the private market down the road.
Some observers say criticisms about a patchwork of state plans and related administrative difficulties is opponents' strongest point.
For example, Oregon, which is the furthest along in implementation, included a reporting provision in its plan requiring employers already sponsoring workplace plans to apply for an exemption from the state mandate, said Will Hansen, senior vice president of retirement policy at the ERISA Industry Committee, which represents large plan sponsors.
If multiple states were to do the same, it could be a compliance burden for employers, depending on the application provisions, Mr. Hansen said.
Because the programs are so new, most states haven't fleshed out the nitty-gritty yet, and many observers expect these programs to ultimately be set up in a similar way. The DOL regulation, for example, offers a guideline for states to do so.
What else could be contributing to the opposition to these programs?
Some observers privately point to the fact that states will, at least initially, only award contracts for investment management and other auto-IRA services to a handful of private companies, which worries other firms that may lose out on the opportunity.
And opponents may be concerned about fees in some programs being capped and competitive from a pricing standpoint, especially as the programs scale up, observers say.
Oregon, for example, is capping its all-in, asset-based fee at 1.05% per year for the auto-IRA program. The average asset-weighted 401(k) fee for $1 million-$10 million plans is 1.14%, by comparison, according to a joint ICI-BrightScope analysis.
"The industry will be forced to account for the fees it charges today for its plans," said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University. "Is that what industry sees as the potential threat?"
