State-Sponsored Private Employee Retirement Plans First Step Towards Nationalized Retirement?
Now that the DOL has begun to aggressively push for state-run retirement plans for private employees, perhaps it is time to assess what this actually means to retirement savers. Specifically, these types of plans have long been outlawed by ERISA. Removing the ERISA mandates, as proposed by the DOL, removes protections to retirement savers they would otherwise enjoy. Worse, creating a spaghetti-code of state-based retirement regulations risks turning what, for many people, has been a relatively stable and consistent retirement system, into a Frankenstein monster that evokes the worst of our national health care system.
The movement towards what amounts to the first step towards nationalizing America’s retirement system is based on a well-publicized series of talking points repeatedly echoed, very often without rebuttal or counter examples, through various media outlets over the past several years. (See “Time Magazine is Wrong!” FiduciaryNews.com, October 8, 2009).
Rebecca Walser, a financial planner and tax attorney at Walser Wealth Management located in Tampa, Florida, does an excellent job summarizing this popularly held view. She says, “Nearly 30 years after the apparent failure of the 401k adequately replacing the former pension system for the majority of America, it is apparent that most Americans did not understand that their retirement will be up to them, beside the small contribution from Social Security. We know this due to the severe underfunding of America’s 401k as demonstrated by the average balance in a 401k – Fidelity reported just an average balance of $91,300 among the 401k accounts they administered as of December 2014. Based on this underfunding and the coming retirement crisis of many of the baby boomers, the government realizes that more must be done by the private individual in preparing for retirement. As there are millions of Americans that have no access to a 401k through their employer, the federal government – mostly the President through the Department of Labor – has decided to push states into offering a plan.”
The actual number of workers who don’t have access to a company sponsored retirement plan varies, but most generally agree the number of Americans, including those who do not contribute to a company sponsored plan and those who are unemployed, who aren’t saving for retirement is well into the “tens” of millions. Attempts to address this “crisis” are laudable, but, upon closer examination, the “cure” may be worse than the “disease.”
“On the surface, the appearance of providing an additional/alternative option to tackle the pending retirement crisis our country faces is enamoring,” says Krzysztof Garlewicz, an Advisor at MFG Wealth Management located in Chicago, Illinois. “Look under the hood and suddenly it’s a political game, mandated programs, state administered ERISA laws set aside, treasury loaded and vendor state relationships that cut out the experts driving retirement outcomes around the country.”
Ironically, it is the poor perception of the retirement industry itself that has opened the door for state-sponsored competition. The celebrated Madoff Ponzi Scheme making headlines at the same time a falling market took its toll on retirement savings, the public was primed for an “easy” alternative. “The financial industry is an easy target for demonization,” says Pedro M. Silva, a financial advisor at Provo Financial Services Inc. in Shrewsbury, Massachusetts. “Many folks in Washington would love to see it be a utility like water or electricity.”
While no state-sponsored effort has yet to leave the assembly line and make it to market, there is one government-backed product that’s on the show room floor right now – the myRA. Before it’s even left the dealer’s lot, the mrRA has been universally proclaimed an Edsel (see “Is myRA myRedundant?” FiduciaryNews.com, November 24, 2015).
“It’s a pretty pathetic attempt at getting people to do what so many have historically proven they won’t do – namely, take charge of their own financial future,” says Christopher V. Kimball, Owner, Christopher V. Kimball Financial Services LLC, Lakewood, Washington. “Another thing which bothers me is, similar to ROTH IRAs, there are income-limits for those who choose to contribute to a myRA. In other words, the very people who make significant income and are most able to afford deferring their income into such a retirement vehicle are ineligible.”
An addition issue may be the lack of integration between the myRA and state-sponsored plans. Kate Crowther, Director of Government Relations at Ubiquity Retirement + Savings in San Francisco, California, says, “In my dealings with the states, only one has discussed or included the myRA program in their legislation. Still on the table is whether or how an individual could roll their myRA into a ROTH IRA established within the state-sponsored program once the saver has hit $15k or would like to consolidate accounts. This should be possible and will be included in future conversations.”
Allowing for the conversion of myRA accounts to state-sponsored plans may be the least of the retirement savers worries. They must contend with what is universally agreed upon as a poor record on the part of states of managing their own employees’ retirement plans. “I live in Illinois, the public pension system here is a disaster,” says Garlewicz. He says it’s “so bad that it’s common place to encounter that assertion in media outlets daily, next to the winning Lotto numbers which are still being paid with IOUs. If you can’t handle your own money, you’re simply not fit to handle others.” Garlewicz would like to see states stop taking on new projects without first solving their existing problems.
One way for states to avoid the problems they’ve encountered while operating their own public employee retirement plans is by removing any fiduciary responsibility from them. “Although any retirement savings plan is better than no plan,” says Walser, “there is no guarantee that states will not repeat the mistakes they make with their public retirement plans. In fact, many states openly admit that they will not offer any plan in the absence of a Safeharbor exclusion from Federal ERISA requirements. If the states were prepared to make guarantees and ensure fiduciary responsibility, they would not need to be exempt from ERISA. The fact that they openly admit that they will not offer a plan in the absence of being exempted from ERISA means that they offer no guarantee of anything and in fact are even unwilling to accept the liability – almost as if they are doing these millions of people a favor.”
Forgoing ERISA not only places retirement savers’ assets at risk, it has the potential to do so in a way that most people won’t even recognize as a risk. “ERISA is the rulebook by which retirement security is protected for folks in our fine land,” says Garlewicz. “It’s been improving as each day passes, plus it sets the standard for which the folks involved in the retirement space must operate.” He likens removing these standard guidelines to removing the rules and playing fields from organized sports when he says, “Take the ump and field out of baseball, what does America’s past-time look like now?”
Speaking of playing fields, removing the ERISA requirement from state-sponsored plan creates an uneven playing field between public and private providers. It’s almost as if the government is endorsing the idea where one set of professionals can offer investment advice but only under a fiduciary standard while allowing another set of professionals to offer investment advice without requiring them to act under that same fiduciary standard. “It unfairly burdens all private employers, who must meet the administrative costs of being in compliance with ERISA at all times, in comparison to the State plans, that do not bear such costs,” says Walser. “Why are the federal standards applicable to an individual employer who may have 20,000 employees, but not applicable to a state that might sign up several million? The states cannot afford the liability if something goes wrong, but can the citizens afford the state not running the program like every employer is expected to? This exemption from ERISA for states in anti-competitive, and provides no oversight or protection to the very employees who might need it the most.”
But the DOL unilaterally rescinding ERISA is not the only action that seems contradictory. There’s also the DOL’s actions which would allow states to create MEPs, despite the DOL’s strong opposition to MEPs in the past. “MEPs make life easier for employers and do so less expensively than individual employers can achieve on their own,” says Pete Swisher, Senior Vice President, National Sales, at Pentegra Retirement Services in White Plains, New York. “This is helpful and can help expand coverage, but it will not cure the coverage gap on its own. The bigger issue is the release by the Department of Labor of a set of rules that seem consciously designed to favor government run systems over the private sector. It is hard to see how this is in the best interest of the country, so it will be interesting to see how this evolves.”
Some politicians questions the legality of the DOL’s actions certainly in regard to exempting states from ERISA but possibly also with regard to inconsistent application of the MEP rules. Swisher says “There are actually quite a few pieces of legislation that have been introduced in Congress in the last few years favorable to MEPs. We expect one of them will pass eventually. The DOL’s opposition is publicly documented. Whether that opposition makes sense or not is another question.”
“Senator Hatch’s bill is straightforward in its intent and clear in its definitions and directives,” says Crowther. “It is a timely and needed bill that will address the sentiment by the private market that the DOL has created an unfair advantage for the states with the ERISA guidance recently released from OMB and now open for public comment. I believe these developments will apply renewed pressure for the Senate to move on MEP legislation; it is viewed by many as a fair compromise in relation to the state programs and clears resistance from the industry to help propel state programs forward.”
Finally, there is an underreported risk with individually run state-sponsored retirement plans. You may remember one of the issues Donald Trump stated was a problem with America’s health insurance system. He said that, because insurance is regulated on a state-by-state basis, it’s more costly for his companies that operate in multi-state environments. The lack of uniformity in state insurance regulations increased the costs of providing that valuable benefit to employees. We may be about to enter into a similar Twilight Zone with state-sponsored retirement plans. Walser says when non-uniform plans are offered, “states with dire fiscal concerns would be more high risk than those states better fiscally managed and [there are] no protections for any state investor anywhere.”
For the most part, it’s hard to find an experienced retirement plan veteran who can see anything positive with these state-sponsored retirement products. “State agencies have no expertise in financial management,” says Silva. “They tackle the issue of fees while simultaneously offering investments that are not in line with a client’s age or risk tolerance.”
“State Pensions are a disaster, so one could only assume that a state Sponsored retirement plan would logically follow suit,” says Chris O’Malley, President of PLATINUM Endowment, Retirement, and Estate Planning in Oak Brook, Illinois.
Even the most charitable professionals remain skeptical. Walser says, “Any plan is better than no plan – so that is a positive. Beyond that, I see major problems.”
Advocates of government sponsored retirement plans are quick to point out the industry opposes them only because such plans threaten the very livelihood of the industry. But this conflict-of-interest works two ways. One must consider what might really be motivating the government to take the first step towards socializing retirement. “I honestly have no clue what they are trying to accomplish,” says Jaime J. Raskulinecz, CEO & Founder of Next Generation Trust Services in Roseland, New Jersey. “Who needs another government sponsored program when there are so many options available to savers now?”
If anything, attempts by the public sector to compete – in, what’s more, a way that tips the scales unfairly – may have one positive result: It may reunify a house presently divided by the Fiduciary Standard debate. “Lower saving deferral amounts, limits on vendors, no matching,” says Garlewicz. “No Advice and fewer choices. The entire push stinks. The only advantage state-run anything doing with retirement is getting professionals around the country, groups like NAPA and other retirement specialists, to pull together and make sure we do everything we can to protect the choices of savers and their fair chance of a desirable retirement outcome is in their hands.”
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