At the White House Conference on Aging earlier this year, President Obama noted that he has put forth proposals to provide retirement savings plan access for American workers, but in the absence of Congressional action, states are leading the charge. 

He announced that, by the end of the year, the Department of Labor (DOL) will publish a proposed rule clarifying how states can move forward in creating retirement plans for private-sector workers.

“We really applaud the DOL and the president for addressing what we believe is one of the most important topics for American workers today, and that is the low percentage of working Americans that have retirement plan access through their employers,” says Fredrik Axsater, head of global defined contribution (DC) at State Street Global Advisors (SSGA). “This is an important step forward on this issue.”

State solutions to filling the coverage gap are “uniquely American,” says Lynn Dudley, senior vice president for global retirement and compensation policy for the American Benefits Council. “It may be one of those things that’s so far left it’s right—because it’s very individualized. It’s not crazy to see a world where people have their own personal financial security plan and it includes their health care and their retirement, and they don’t necessarily think of this as a government entitlement, they think of it as something that they are building.”

Before participants can build that future, though, the guidelines need to clear a few hurdles, Axsater says. First, “participant and plan sponsor success should be made easier”—i.e., by optimizing the plans’ design. “State plans should encourage, for example, automaticity. That’s the way to use inertia in the right way of helping people, nudging people to participate in the plan and to save more,” he says. To make saving easier, simplify the fund lineup. “We know that too many choices is overwhelming, so listen carefully to some of the choice architecture that’s been done.”               

Second, “Participant and plan sponsor failures should be made more difficult,” according to Axsater. Getting and keeping participants—and their savings—in the plan is not just about facilitating enrollment but also limiting leakage. “Find ways to make it a little bit more burdensome for participants to withdraw assets from the plan, or reduce some of the cash distributions,” he says. If participants do take loans or hardship withdrawals, or if they are going to leave the plan and/or move to a new employer, “make loan repayments easier and plan-to-plan transfers more operationally efficient and seamless.”

Finally, Axsater says, these plans will require “superior, ongoing governance” in order to be effective. “As participants’ needs change, as their priorities change, as markets evolve, these plans [must] have the ability to evolve and improve over time.”

Dudley adds, “The big thing is they need to outline what the administrative steps would be [to implement these plans], and employers need to be aware that it’s applicable to them.”

“We don’t see [state solutions] as a silver bullet,” Axsater adds, “and this also can raise some issues on its own.” For example, how will these plans serve employers and employees across state lines? “It’s important to look at pros and cons and the trade-offs that will be involved.”

Dudley says, “Their number one issue is they need to be able to be fair. Their number two issue is [companies] need to run their business, and they can’t have so much complexity that it is adding administrative costs”—costs the participants would have to pay.

“Not only do [employers] have to track and comply with the law, but they have to track the source of the money and the earnings on the source,” Dudley says. “And one reason that’s problematic is that, in the future, states will try and tax the retirement money because it was source-driven.”

How different will individual state’s plans be, Axsater asks. “For employers that may have people across multiple states, that would be a challenge,” he says. What policy would dictate a retiree’s decision to move out of state when he exits the work force?

If a person lives and works in one state, has savings put into a retirement plan and grows his assets there, what percentage of the assets can be attributed to his time working in that state? “You have to do these complicated calculations for every person,” Dudley points out, “and then you get prone to making mistakes.”

“It’s important then, that these plans, as they emerge, consider the entire ecosystem,” Axsater says. The problem is not just one of access and investment, “it’s also about strong communication support, strong engagement with participants” and, eventually, “helping them with the transition from savings to distribution.”

“You don’t want to preclude innovation,” Dudley says, “but you don’t want to create bureaucracy for the sake of bureaucracy, and you don’t want to treat people differently.”

“We talk about the ‘Great Divide’—that there are some really strong practices that are used by the mega plans, the largest employers in the U.S., and the lack of access, the lack of retirement savings for smaller plans,” Axsater says. “I think that the state plans initiative is a way of addressing the great divide, but it’s part of a broader agenda here in terms of how to get more people to be able to save, and make it easier for them to save and have the type of retirement that they want.”

In terms of access, he says, far more large employers offer plans than do smaller companies. Fewer people enroll in those smaller plans, and those who do participate do so at a lower rate and have smaller balances overall.                      

The impact of state-run plans on employer-sponsored plans will largely depend on the plan’s size, Axsater predicts. “The impact for the mega market is limited,” he says, while for smaller plans it is “potentially significant.”

“It’s not that employers aren’t respectful of the challenge of creating access,” Dudley notes, “it’s that it has to be administratively feasible, they have to get credit for what they’re doing, and they have to be able to be fair.”

Given that federal-level solutions have been slow on the uptake—see myRA, among others—“The states are in various stages of trying out legislation in a whole range of retirement- and compensation- related efforts,” says Dudley. This recent initiative, “is part of a larger policy trend.” She sees concern for the fact that a lot of people are moving from job to job—and in the future that may continue on a more significant scale.

“There’s not only job turnover over people’s careers,” she says, which already is very different from most Baby Boomer’s job history, “but it’s also the way they work.” Many more people have only part-time or project-based work, she says, “There need to be some options to fill the gap.” A lot of companies may have thought state plans were not relevant to them if they already had a plan in place, but that is only true so far as they have full coverage.                     

“I think companies that are already offering very robust retirement plans are thinking that, so far, at the state level, they would be excepted from [new legislation] because they’re already offering very robust plans,” Dudley says. “To the extent that they have employees that are part-time or contingent, then I think that they’re ok with having to comply with states as long as they can do it in a reasonable way.” The problem arises in a “situation where they have to go state by state and there are different rules”—i.e., for the type of plan offered or contribution made.

The emergence of these plans may lead employers to rethink their retirement benefit offering, Dudley warns, and policymakers likely will struggle to do this in a way that will not cut off jobs.

“It’s important to consider the entire ecosystem here to make sure that we don’t have any unintended consequences from the individual state initiatives,” Axsater adds. “State plans can offer a very easy way to provide access to retirement savings,” he says, but before they can meaningfully affect potential savers, policymakers must ask themselves: “What are the needs of individual investors?”

“I don’t know exactly how we’re going to figure this one out,” Dudley concludes. “It’s a tough nut to crack.”