One of the vexing issues with retirement savings is if people don’t have payroll deductions done at work, they rarely save on their own in an IRA. Everybody with income has the chance to do it, but the numbers show they likely won’t. To address this concern, the prior administration instructed the labor department to create regulations that would make it easier for states to offer automatic enrollment IRA plans.
Many states including Maryland have moved full speed ahead in trying to get these plans moving. Last night, the Senate voted against the ruling allowing ERISA exemption on these plans. The idea behind the plans was that States could force employers (or heavily encourage) to offer plans. Typically there is some sort of employee number (ex. firms with over 10 employees) as well as a private public partnership whereby an investment provider or recordkeeper would receive the IRA assets that were withheld from employees pay and set-up an IRA for them. At issue is these would not be profitable for many years. To discourage competition, the ERISA exemption was only offered for the State based plans versus allowing a private sector solution to also qualify for the exemption.
The other concern of employers was administrative difficulty. If you are a DC metro based employer, you could easily have three (DC, MD, VA) or possibly 5 (WV, DE) separate plans to account for. What also wasn’t very clear was whether those who offer 401K or 403b plans would have to enroll employees immediately in the State based plans because their ERISA based plans had waiting periods. None of these concerns were really addressed by those in the pro-auto IRA camp.
We felt these plans would be great incubators for the qualified plan marketplace. Once employers were dealing with withholding and sending in contributions, they might consider enhancing their offering by moving from the State solution to a 401K or 403B that has higher deferral limits, employer contributions (another area the regulation wasn’t clear on), vesting schedules, and customized fund offerings. For now, the pro-auto IRA has hit a road bump but we are hopeful that the momentum achieved will ramp up so a combination of private sector and public sector plans can address our countries current savings gap.