GOP targets state-run retirement savings plans

Among the Obama-era regulations that Republicans are trying to roll back are U.S. Labor Department rules issued in August allowing states and large cities to establish retirement savings plans for millions of Americans who don’t have access to a plan at work.

This is a partisan issue between Democrats who support the plans and Republicans who oppose them. Two pieces of legislation that would undo the rules were approved Feb. 15 by the U.S. House along party lines. Only one Democrat voted for each of the rollbacks, while less than a handful of Republicans supported preserving the rules.

“This is really a ‘what side are you on’ vote. Are you for Wall Street or Main Street?” asked Steven Herzenberg of the Keystone Research Center, a Harrisburg group that supports the state-run plans.

Proponents assert the plans would encourage the nearly half of U.S. private sector workers who do not have access to a payroll-based retirement plan to save more for retirement. In Pennsylvania, which is in the early stages of talking about a plan, about 2.2 million workers — or 44 percent of the private sector workforce — do not have retirement savings plans through their workplaces, according to AARP.

Opponents, including financial services industry groups, say the state-run plans aren’t feasible because they target part-time or lowpaid workers. Many of those eligible won’t contribute anything and those who do will save less than proponents estimate, critics insist.

That will mean participants who do use the plans will pay high fees and taxpayers may end up footing some of the costs, according to David Blass, general counsel of the Investment Council Institute, a mutual fund industry group opposing the plans.

“We want good public policy and we’re just concerned these are not going to be viable plans,” Mr. Blass said.

Many small companies cannot afford to offer 401(k) retirement plans because they cost too much to establish and administer. In some cases, workers aren’t interested in participating.

Widespread concern that many Americans have inadequate retirement savings spawned the idea of the state-run plans.

A set percentage of pay, typically about 3 percent, would automatically be deducted from a worker’s paycheck and contributed to an IRA account that offers limited investment choices. Workers could opt out or choose to save less. Their employers would not contribute anything.

The Pew Charitable Trusts found broad support for the idea when it polled companies with between five and 250 employees. Survey results Pew released in January indicate 27 percent of the

businesses strongly supported the plans and another 59 percent somewhat supported them.

“We have the opportunity to create a marketplace where more Americans can save and ultimately bring more customers to the financial services industry,” said Diane Oakley of the National Institute for Retirement Security, a Washington, D.C., research and education group.

States going ahead with the plans have looked at whether they are feasible.

Boston College’s Center for Retirement Research examined Oregon’s proposed savings plan to see how long it would take to break even. The center estimated that if fees were set at 1 percent, an annual fee of $35 was charged, and the contribution rate was initially set at 5 percent of a worker’s pay and gradually increased to 10 percent, it would take nine years before tax revenue was no longer required to support the program. A 3 percent contribution rate would extend the breakeven point to 17 years.

The Labor Department rules exempted state- and city-run plans from a 1974 federal law that protects the pension and health care benefits of private sector workers, leaving participating companies with only the responsibility of taking the funds from paychecks and sending them to the plans.

“We think, ultimately, that is misguided,” Mr. Blass said.

But proponents of the state plans question the mutual fund industry’s sincerity when it comes to looking out for the small investor. They said if the fund industry had the small investor’s interests at heart, it would offer more affordable terms on small accounts and jump at the chance to increase the client base by backing state-run retirement plans.

“Smart and decent financial services firms should support states and cities stepping into the void,” Mr. Herzenberg said.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.