The Retirement Revolution
New federal rules open the door to state-sponsored retirement plans. How will they affect traditional employer-sponsored plans?
By Jack Robinson
Many states and even cities are planning to sponsor retirement plans for people who aren't covered at work. Large employers, though not yet directly affected, worry about where the trend may lead.
"The biggest concern for large-employer plans is -- what's next?" says Will Hansen, senior vice president for retirement policy at The ERISA Industry Committee, a trade group representing large employers on health and retirement regulations. Before taking the job in February, he was a senior HR manager overseeing benefits at Holland America Line, the Seattle-based cruise-ship operator.
Particularly worrisome are plans such as the one adopted by California on Sept. 29 that requires virtually all employers lacking a plan of their own to automatically enroll workers in a state-run program.
"We fully support a secure retirement system in America," Hansen says. "But we support it on a voluntary basis. We already have a mandatory system -- that's Social Security. So anything to chip away at the voluntary nature of our retirement system is concerning to our members."
Weighing in favor of the state plans, however, is mounting anxiety nationwide about retirement readiness. A GAO study last year reported that among Americans ages 55 to 64, more than 40 percent have no savings at all. Another 20 percent have less than $50,000. That's a big problem with rising life expectancies, especially since Social Security benefits will cover only some of a retiree's minimum needs.
One reason for the lack of savings is that many workers in private industry do not have access to an employer-sponsored retirement plan. The figure is about one in three, or 68 million workers, the Bureau of Labor Statistics estimated in a report early this year.
State and local governments will bear the burden if those workers need financial help after they retire. Frustrated by years of Congressional gridlock, many of those governments are acting on their own to set up basic savings plans for companies that don't have their own.
"We're trying to take a proactive, forward-looking approach to problems that are just over the horizon," says Alan Butkovitz, Philadelphia's city controller. He is among the nation's more aggressive proponents of a city-sponsored plan.
"People haven't really wrapped their brains around the amount of income . . . necessary to live for possibly 20 or 30 years in retirement," Butkovitz says. "If you wait to address that until that's happening, you're really going to be sunk."
Over the last four years, the movement gained momentum in statehouses. So far at least 30 have plans in place or under construction. They fall into two main categories: those that are subject to Employee Retirement Income Security Act regulations and those that aren't.
Those that are governed by ERISA include several models. The state of Washington, for example, is due next year to launch a "marketplace" that helps employers find plans. Another common model, called "open MEP," sets up multi-employer plans, pooling assets and sharing costs.
Other states, such as California and Illinois, are pursuing a more aggressive approach: a state-sponsored "auto-IRA" plan not governed by ERISA. These plans are mandatory for employers of a certain size that lack their own retirement program. Typically employers are required to automatically enroll employees, who can opt out if they wish. Employers have minimal costs and responsibilities, and are not allowed to contribute to the plan.
Final rules issued by the Labor Department last month allow states to set up these plans exempt from ERISA regulations as long as they are voluntary for employees. Separately, a proposed rule would extend that ability to cities with at least 600,000 residents -- the population of Wyoming, the smallest state.
That could be attractive to large cities in states with conservative legislatures -- such as Philadelphia. The Labor Department rule is an acknowledgement that cities "shouldn't have to go through the meat-grinder of the state capitol" to set up a plan, says Butkovitz.
None of the state or city-sponsored plans would directly affect employers that have their own retirement plans. In theory, some of those employers could drop their own plans in favor of a state-run plan. But that would likely mean a cut in the benefit, as well as the cost. Experts think that's not likely to be a tempting option.
"For a large employer, it's probably simpler to keep administering the plan you have," says Stacy Scapino, a Chicago-based partner at Mercer Investments who is deeply involved in the issue. "The states are not looking to drive people out of providing the plans. That's been very clear in everything they're doing."
Some large employers could be affected if they have a large population of employees who are ineligible for the company plan, perhaps because the work is seasonal or the industry has high turnover.Â Those companies could face administrative headaches complying with multiple state retirement plans.
Hansen of the ERISA Committee, however, doesn't see that as a major concern, because most large employers already allow even part-time employees to enroll in their plans. And those employers always have the option to expand eligibility for their own plans.
But the mandatory nature of some state plans -- even if they don't currently apply to companies with retirement plans -- is a concern, he says. National employers worry those mandates could become more expansive.
"What if an employer doesn't offer a retirement plan that the state legislature thinks is appropriate?" he asks. If that were to happen, some states could start setting minimum standards for private-employer retirement plans. Then "we're going down a road where companies have to comply with various laws throughout the country."
Hansen says the committee supports voluntary "marketplace" approaches such as the Washington state program.Â While some critics suggest voluntary plans won't be effective, Hansen notes that the marketplace approach lowers the cost and compliance barriers that are the main reason employers do not set up plans.
In Philadelphia, where leaders are in the early stages of exploring a city-sponsored plan, the controller favors a middle course: a "open MEP" plan that is less of a burden for employers than a traditional plan but more costly than an auto-IRA plan. Like the "marketplace" approach, it would be voluntary and allow employer contributions.
This model is even getting some traction on the national level -- despite years of stalemate in Congress. A bill passed with bipartisan support out of the Senate Finance Committee in September would allow voluntary "open MEP" plans on a national scale.
"The state plans are putting pressure on the federal government to come up with solutions," says Scapino of Mercer Investment. She notes, however, that some have questioned whether a plan based on voluntary employer participation will reach enough of the workers who aren't saving for retirement.
For now, however, the states and cities are leading the way. Butkovitz discounts worries that their plans will expand to create a regulatory nightmare for employers with a national footprint.
A bigger threat to large employers, he says, is a tidal wave of political discontent that could result from millions of workers facing poverty in retirement. "That's going to happen even more dramatically," he says, "if nothing is done."
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