Between the reduction in the number of traditional pension plans, and the rise of the 401(k) plan as the new standard for retirement plans, along with the uncertain financial stability of Social Security, questions have been raised about whether current and future generations will have sufficient savings to enjoy their retirement years.  As evidence of the impending problems that we may face, it has been frequently reported that many senior citizens have tried to return to the workforce, at least on a part-time basis, to help make ends meet. To address this retirement coverage gap, the federal government has introduced a number of public policy proposals, each with its own risks and drawbacks.

In two of his final three State of the Union addresses, President Obama touched upon improving retirement savings coverage and portability to respond to these concerns, as well as the dynamics of today’s workforce. Obama used his executive authority to have the Treasury Department create and implement the myRA in 2014, which gave a retirement savings option to people who do not have access to 401(k) style plans.  In his 2016 speech, he reiterated the importance of employees having access to retirement savings vehicles, and having that access and those benefits be portable as they move from job to job.

Despite this push for a national program for retirement savings, the looming coverage gap remains.  In an effort to address the issue of long-term retirement security, several states are looking to offer defined contribution plans to private employers and employees. The Department of Labor (DOL) has put forth guidance on IRA-based programs that states should consider as they develop state-run programs for private employers.  This is helping to clear a path for these plans, but it is not without controversy.

Because of the potential for defined contribution style plans, such as 401(k)s and 403(b)s, as well as health insurance plans, to provide disproportionate benefits to highly compensated employees, the federal government enacted the Employee Retirement Income Security Act of 1974 (ERISA).  This legislation infused a variety of protections for employees, so that the benefits may be provided in a non-discriminatory manner.  All 401(k) plans, and certain types of 403(b) plans, have been subject to these regulations for four decades to help keep plan participants informed about their benefits and their rights.  It also requires employers to provide annual reporting on the plan, as well as to fulfill fiduciary responsibilities related to plan oversight, including having a diversified investment array, employee communication and reasonable fees.

Retirement plans for federal and state governmental employees are not subject to ERISA.  Many of the protections that were incorporated into the ERISA legislation are not included in these public retirement plans.  While it has not been definitively stated, it is likely that state-run IRA programs for private employers and employees that follow the principles from the DOL guidance will be exempt from complying with ERISA.  

Many are questioning whether having a variety of state-run retirement programs is appropriate.  While some employers may complain about the administrative burden imposed by having to comply with ERISA, it allows for the uniform application of the law and fosters consistent treatment of employees, regardless of where the employer may be located.  The guidance offered by the DOL describes three different types of scenarios for states to adopt.  As our increasingly mobile members of the work force transition to jobs in various states, they will encounter different versions of the state-run IRA, leading to confusion.  This confusion will likely lead to reduced participation, as employees grapple with the differences.

The lack of ERISA protections is also a concern.  As an example, the myRA program requires that all contributions to the account be directed to government savings bonds.  Not only does this subject the user to a non-diversifiable inflation risk, it presents a conflict of interest and is a form of self-dealing, since the federal government runs the program.  Investments for the state-run programs do not appear to be this rigid, but this model paves the way for states to focus less attention on offering a diversified investment lineup to the participants.  Beyond this, if these state-run plans meet with some success, private employers that are currently offering ERISA protected plans may decide that they no longer wish to absorb the cost and administrative effort to offer their own plan, and abandon it in favor of the state program.  This will subject even more participants to a program that lacks strict federal protections.

Continuing the discussion and search for solutions to address the retirement gap is a worthy endeavor for governments at all levels to contemplate.  A national program that enables private employers to make a retirement plan available to their employees, and incorporates the protections of ERISA, is a more sensible approach to helping Americans not currently offered a savings program to establish and build their retirement nest egg.

Allen is a partner at Cammack Retirement Group, a New York-based consulting firm that serves retirement plan sponsors in the public, corporate and nonprofit sectors.