Skip to main content

You are here

Advertisement

What’s Wrong With State-Run Retirement Plans?

A new report cautions that, while well-intentioned, states considering mandating automatic enrollment payroll deduction IRAs are likely to hurt the very workers they think they are helping.

The report, published by the U.S. Chamber of Commerce, notes that under such programs:


  • workers are significantly limited in how much they are allowed to contribute (the report notes that under state auto-IRA programs, the amount employees can personally contribute is about one-third of what is allowed in a 401(k);

  • employers are prohibited from contributing at all;

  • fewer small plans will be started; and

  • many existing small plans will be terminated, and important worker protections will be lost.


The report notes that each state will have different rules for its program and all employers will have to track them to ensure compliance — different standards for eligibility, notices and similar matters will affect nearly all employers whether they currently offer a plan or not.

Additionally, the report explains that there may also be administrative problems associated with the payroll withholding, saying, “It is not clear what the obligation employers might have with respect to tax rules limiting contributions for some workers. For example, will the employers be called on to address excess contributions or contributions violating certain income limits?”

‘Alternative’ Investments

The report concludes that rather than mandating that employers without a plan offer a state IRA, policymakers ought to make it easier for small business to offer retirement plans that best serve workers’ needs.

To help spur growth in employer plans, the report highlights the following options:


  • Multiple Employer Plans. MEPs are a way to let small businesses “join” a plan rather than having to offer one all by themselves.

  • Small Businesses Tax Credits. The report recommends that the small business tax credit for employer-plan startup costs be expanded by broadening it and making it refundable.

  • Simplified Compliance Testing. Another aid would be to create new optional nondiscrimination testing and eliminate or relax top-heavy rules to encourage greater implementation and maintenance of 401(k) plans.

  • Streamline Notice Requirements. Over the years, new notices have been created for specific issues without material coordination with existing requirements. As a result, plan administrators face unnecessary complexity and duplication, according to the report, which explains that streamlining these notices would save workers money in plan expenses and reduce the difficulty of administering plans.

  • Default Electronic Disclosure. Currently the Labor Department does not permit electronic communication as a default for most plans, according to the report, while allowing people to request paper notices and statements, but otherwise providing such information electronically would save workers money in unnecessary paper mailings.

  • Encourage ESOPs. The report suggests promoting the benefits of employee stock ownership plans and protecting them from frivolous litigation and excessive regulation.

Advertisement