Let me begin with the obvious. I am more than a little biased on this issue. My company, TAG Resources, is in direct competition with this new state-run model. I am working on a paper that will more properly address the topics I will touch upon today, but the DOL’s further easing of guidelines for State Run plans hit the wires this week and I wanted to get something out.
It is not secret that there is a retirement gap, problem, crisis, here in the US. When Tom Perez, the Secretary of Labor in the US, said this week, “We need to fortify the pillars of retirement,” he is absolutely correct. In the retirement industry, both private and state, we’re all on board with his statement and equally committed to addressing this. The US is the greatest country on earth. It is also one of the largest and most complicated. We’ve got brilliant minds that don’t often talk to each other, and we’ve got national issues with agendas that seldom match up with the better solutions, many of which already exist. State-sponsored retirement plans are a prime example of this.
The right way to address this issue is to talk through the products and programs that already exist in the private sector… but that will be the subject of another writing. Today, a quick run-down on the three things it takes for a successful retirement program and then we’ll conclude with how the deck is being toyed with to make these State-run programs even available.
Here are the three general elements that make up a standard offering:
Money, Time, and Protection
Point 1: Money. It takes money to retire- and lots of it. A successful program is going to take an individual being a part of a retirement offering and then making meaningful contributions to that offering. Auto-enrollment and auto-escalation are both mission critical if we want to see a real change in the retirement ‘gap’.
Point 2: Time. How much time until retirement age plays a significant role in determining how much money (Point 1) will take and how long (Point 2) a person is willing to stay in the workforce to accumulate it.
Point 3: Protection. Normally, we’d all name ‘Risk’ as the third thing that affects how much you put away and the amount of time it takes to do it—and that is absolutely worthy of its own discussion. But I threw in ‘Protection’ meaning that is what ERISA is, and what the DOL holds us (at least ‘us’ in the private sector) to, regarding how we handle participants. Protecting participants means giving them a fair environment, not favoring one group above another, and issuing loads of disclosures and notices regarding plan specific information and their rights within it.
Both the state and the private sector can offer up a plan to the small businesses that don’t get offered one. Getting to people at their place of employment to do this is key. But while both private and state plans can offer a program to the small business owner, only the state has the opportunity to make it mandatory. Both the private sector and the states can offer low-cost investment platforms, but only one has the burden of protecting participants, abiding by ERISA, adhering to government compliance, and shouldering the cost to do so. Care to guess which one?
Time will tell if these state-run plans offer any substantial help in the coverage issue we’re trying to address. Time might also tell us that if our states don’t have to worry about ERISA, maybe we shouldn’t be concerned about it either.