Obama looks to states on retirement readiness

President Barack Obama this week asked the Department of Labor to propose a set of rules by the end of the year that would provide a clear path forward for states to create retirement savings programs.

During the White House Conference on Aging, Obama said that even while the country continues to make strides in offering health care to more individuals, many older workers leave the workforce without having saved enough for a dignified retirement.

“There are a lot of folks out here who work really, really hard, but at the end of the day just still don’t have enough of a nest egg. In today’s economy, preparing for retirement has gotten tougher,” he said.

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Most workers don’t have access to traditional pension plans anymore and many people don’t have access to employer-sponsored retirement plans.

A good chunk of Americans are relying on Social Security, but there are no guarantees the program will provide the benefits they are expecting by the time they retire.

“We have to keep Social Security strong, protecting its future solvency,” Obama said.

He added that the country has to “make it easier for people to save for retirement.”

About one-third of Americans do not have access to a retirement plan at work. The good news, he said, is that states are stepping up to do what Congress has been unable to do.

“So far, a handful of states have passed laws to create new ways for people without a workplace plan to save for retirement. And more than 20 states are thinking about doing the same,” he said.

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The biggest road block to hosting a state-sponsored retirement vehicle is the “way the current regulatory and legal environment is structured, with this crossover of ERISA and non-ERISA plans, IRAs and 401(k)s, the states in their research are finding that if they don’t do things right they could be subject to ERISA,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco. “Their fear is that it will be more costly, more complicated and will potentially slow down the initiative.”

It isn’t clear from Obama’s comments whether these new plans would be state-run plans or if private industry could come in and offer a solution, Parks says. If states put a plan in place and these plans aren’t subject to ERISA rules, it could put private providers at a disadvantage, he adds.

“It is a huge opportunity. I’ve been championing this cause since I first heard about it,” Parks says. “I believe it is a good happy-medium solution.”

He believes that once employees are in the plan and getting the money taken out of their paychecks through payroll deduction, employers might decide to graduate to a 401(k).

“Most of our industry is saying that the private industry doesn’t want to do it. If they wanted to do it, they would do it already,” he says. “They don’t have the infrastructure or the desire to have literally millions of individual small contribution accounts on their platform. They are not interested in that. They see it as a customer service issue.”

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Illinois and California have already begun work on their state-run retirement plan offerings. Illinois is further along. The state wrote into its bill, which was signed into law in January, that companies with at least 25 employees will have to offer an individual retirement savings option by June 1, 2017.

Companies can work with private providers to implement a 401(k) or pension plan or they can take part in the Illinois Secure Choice Savings Program, a plan that will default employees in at a 3% contribution rate.

California agreed in 2012 to do research on the topic before implementing a state-run retirement plan option. Other states are also considering state-run plans.

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“It is perverse that in this country it is just easier to save if you’ve already got money. And I’m talking about not just the fact that you’ve got money to save; I’m talking about just the mechanics, the mechanisms of being able to save, and then take advantage of the tax benefits of savings,” Obama said in his remarks. “So if we can just make sure that everybody, even if your employer doesn’t provide these mechanisms, you still have a way of accessing it, every dollar you put in, that’s going to be a dollar that also then benefits from the same kinds of tax advantages that somebody with a million dollars is able to take advantage of all the time.”