Letter from the US: State boost to pensions
Next year will start with a new initiative in the US pension fund industry – the launch of the first retirement savings plan created by a state for private-sector employees. Washington State is the pioneer with its Small Business Retirement Savings Marketplace, and it will be followed by other states.
The Obama administration has pushed the states towards this type of retirement provision. The rationale is the lack of workplace retirement plans for some 60m American workers – especially those employed by small businesses and the self-employed.
President Obama had already introduced myRA during his 2014 State of the Union Address. It is a starter savings vehicle for middle and low-income individuals who do not have access to an employer sponsored plan like a 401(k). MyRA (My Retirement Account) is a type of Roth Individual Retirement Account (IRA) account (people contribute money after taxes are paid, and any gains or withdrawals are tax-free), with a maximum limit of $15,000 (€13,660), that invests exclusively in US Treasuries. Few have opened a myRA, so this year the White House issued rules to give states a roadmap for establishing their own plans.
Washington State was the first to act. Last May, Governor Jay Inslee established the small-business retirement plan marketplace, under the responsibility of the state Department of Commerce. Participation is voluntary, but only the self-employed, sole proprietors or employers with fewer than 100 employees are eligible. The marketplace will offer life insurance plans for retirement purposes and three types of savings plans: a Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) that allows for employer contributions; a payroll-deduction IRA that does not; and myRA.
The Department of Commerce will select low-cost savings plans from companies participating in the marketplace. These must offer a minimum of two products: a balanced fund and a target-date or other fund with asset allocations and maturities designed to coincide with expected retirement. The marketplace will operate from January 2017.
The AARP (formerly the American Association of Retired Persons) has applauded the initiative, stressing that Washingtonians, like all Americans, save too little for retirement. The small business group Main Street Alliance also supports the model, because it allows small businesses to offer benefits that are competitive with larger companies, helping reduce employee turnover and training costs.
However, the Small Business & Entrepreneurship Council, is concerned that the plans will become mandatory and place more burdens on employers.
Mandatory state plans for the private sector are already expected in 2017. The key one will be the California Secure Choice Retirement Program, aimed at 6.8m Californians without a workplace retirement plan. Companies with five or more employees will have to automatically enrol.
If an employee does not select a contribution amount, 3% of salary will be contributed. Initially, the state will invest the money in Treasuries and other safe investments until it chooses money managers to offer other products.
Similar programmes have been approved in Connecticut, Illinois and Oregon. The latest Department of Labor rules also allow municipalities to create plans. Last October, New York Comptroller Scott Stringer unveiled the NYC Nest Egg, a marketplace offering access to a set of screened, employer-sponsored, ‘prototype’ 401(k) plans that would include a publicly sponsored Empire City 401(k) Multiple Employer Plan, and potentially SEP-IRA and SIMPLE IRA plans. Employers must enrol employees into the programme, while workers are free to opt out. One investment option will be myRA; all the others will consist only in passively managed lifecycle funds, with basic low-cost index funds such as the ones in the federal Thrift Savings Plan.