Compliance November 23, 2021

MarylandSaves State-Run Retirement Program to Launch Next Summer

The plan focuses on helping employees build emergency savings before saving for retirement.

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Josh Gotbaum, chair of the Maryland Small Business Retirement Savings Program, and a former director of the Pension Benefit Guaranty Corporation (PBGC), announced that MarylandSaves will begin offering its new automatic workplace retirement and emergency savings program next summer.

Building on the experiences of programs in other states, MarylandSaves will be the first such state-run program that helps people have reliable income after they retire, according to the announcement. Savers in the program will automatically have their assets converted into a monthly paycheck at retirement age unless they choose otherwise. They will also have an option to increase their Social Security payments by deferring Social Security enrollment and receiving their MarylandSaves funds first instead.

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The program also differs from other state programs in that it focuses on helping employees build emergency savings first. Initially, funds will go into an emergency savings account using the Lincoln Financial Stable Value Fund. This fund currently has a guaranteed interest rate of 1.4% and there are no separate investment fees. After the emergency savings account has been funded, the participant’s contributions will be invested in the age-appropriate BlackRock target-date fund (TDF). Optional investment choices include an income fund (State Street Aggregate Bond Index Fund, Class K) and a growth fund (T. Rowe Price Global Growth Stock Fund).

MarylandSaves is a state-sponsored program designed to make it easy for businesses to offer their employees a voluntary, automatic, low-cost, portable retirement and emergency savings plan. Under Maryland law, established businesses that use an automatic payroll system are required either to offer a retirement plan or to sign their employees up for the MarylandSaves program. Businesses that do so will receive $300 per year via a waiver of the Maryland business annual filing fee. Employers will have no payment obligations, have no federal reporting requirements and will pay nothing to MarylandSaves for the service.

Employee participation is completely voluntary. Employees are automatically enrolled, but they can withdraw funds, choose investment options, change their savings amount or opt out entirely at any time. The announcement says account fees will be lower than commercial alternatives, and savers keep their accounts when they change jobs.

The program will be administered by a team composed of Vestwell, Sumday and BNYMellon, which the announcement says were selected after a rigorous competitive process. All savings will be professionally managed at negotiated rates by BlackRock, State Street Global Advisors, Lincoln Financial Group and T. Rowe Price.

Maryland joins other U.S. states (California, Connecticut, Illinois, Massachusetts New Jersey, New York, Oregon, Vermont and Washington) and two cities (Seattle and New York City) that have enacted legislation or set up the retirement programs to help close the retirement plan coverage gap. The states’ efforts are in addition to efforts from a new generation of providers—i.e., nontraditional recordkeepers—that are using technology to make offering a retirement plan cheaper for businesses and to bring employers more flexibility, as well as legislative efforts to ease administration through pooled employer plans (PEPs).

A survey from the National Institute on Retirement Security (NIRS) finds strong support for new state-facilitated retirement programs aimed at helping workers without employer-provided plans save for retirement. Seventy-two percent of Americans agree that state-facilitated retirement savings programs are a good idea, with high support across party and generational lines. Three-quarters of survey respondents say they would participate in these retirement programs if they were offered in their state, and most express favorable views of features such as portability and low fees.

Ask the Experts November 23, 2021

Difference Between Annuities and Mutual Funds

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“I just started working in employee benefits at a private university and am new to 403(b) plans. I understand that the only permissible investments un 403(b) plans are annuities and mutual funds, but can you explain the difference between the two?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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Certainly, and you are correct that, at present, 403(b) plan investments (with the exception of church 403(b)(9) retirement income accounts) are limited to fixed and variable annuity contracts under Code Section 403(b)(1) and custodial accounts for regulated investment company stock under Code Section 403(b)(7), more commonly known as mutual funds. From time to time, legislation is proposed in Congress that would add to the types of investments available to a 403(b) plan, but none has ever become law as of this writing.

The Experts defined an annuity contract in a previous Ask the Experts column as an insurance product, where the insurer provides a contractual promise to the contract holder (plan participant) to pay a specified amount at regular intervals over a specified period of time, which may be for the participant’s life or the joint life of the participant and a designated beneficiary, similar to a defined benefit plan (for example, X dollars a month over the participant’s lifetime). The insurance company is ensuring that the participant will be paid such a benefit, which is why it is an insurance product. There are two general types of annuities: fixed, or traditional, annuities, where the rate of return is fixed by the insurer, or variable annuities, where the rate of return can vary as it is tied to the performance of an underlying investment.

On the other hand, a mutual fund is a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce returns for the fund’s investors. Mutual funds are basically a way to give individuals access to professionally managed portfolios to which they might not otherwise have access. Unlike annuity contracts, however, there is no insurance component, and thus there is no contractual provision to pay a benefit to the account holder in the future—the account holder will simply receive the value of his/her interest in the fund upon distribution. However, a mutual fund holder could still opt to use the proceeds of the mutual fund to purchase an annuity contract at any time, subject to the terms of the 403(b) plan. 403(b) plans consisting of both annuities and mutual funds often allow transfers between the two investment types, subject to certain restrictions.

It should also be noted that there is generally no guarantee as to investment principal (the sum of all contributions and/or rollovers in the case of a 403(b) plan) in mutual funds and variable annuities; should the investments decline in value, the investor could lose at least some of what he/she invested in the contract (though, with variable annuities, should the investor die, a death benefit payable to the beneficiary would typically guarantee at least the amount of principal invested). The principal in fixed annuities, however, is insured against loss by the insurer, except possibly in the event of insurer insolvency.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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