Are state-run auto-enrollment IRA programs a good approach to retirement concerns?

Estimated reading time: 2 minutes, 42 seconds

By Charles “Bo” Ives, Kingdom Trust President

Less than half of workers have access to a workplace retirement plan, according to The Pew Charitable Trusts. That same report states that only 22% of Americans are very confident they will have enough money for a comfortable retirement. Because of these and other negative indicators, policymakers at federal and state levels have sought ways to encourage retirement saving. Recently, various states have passed legislation enacting automatic-enrollment IRA programs to help those employees without access to a workplace retirement plan.

California’s Secure Choice Retirement Savings Program is the latest such state legislation. Senate Bill 1234, which is the bill to enact Secure Choice, is expected to become law soon. SB 1234 requires all California companies with at least five employees to either offer their own retirement plans or enroll the employees in Secure Choice. The law, which is currently in the hands of California Governor Jerry Brown, seeks to provide retirement plan access to 7 million workers who otherwise would not have such access.

Offering a solution to the ever-increasing gap in savings and retirement needs is a great thought and a much-needed action. But perhaps this isn’t the best approach.

Are State-Run Auto-Enrollment IRA plans the best option?I would prefer lawmakers consider a plan allowing the employee to request from the employer an automatic payroll deduction to an already-existing IRA or a program permitting the employee to open an IRA at a firm of his or her choosing. This could encourage the employee to be active in the deployment and investment of those funds and seek out a financial advisor to help set up a long-term plan.

Many have concerns about government taking retirement funds and managing them like a state-run 457, leaving choices up to a public board that doesn’t know each underlying participant nor his or her long-term goals. According to the Financial Services Institute (FSI), “the leading reasons for not saving for retirement – a lack of income or other pressing financial needs – will not be addressed by state-run plans.” The FSI is also concerned employers may drop existing plans as a result of new state-run retirement programs, and it questions the overall cost and administration of these “mandatory plans.”

Governor Brown has until the end of the month to decide whether to veto Secure Choice, sign it into law or let it become law without his signature. Even with passage, it could take months to over a year before enrollment could begin.

What California and other states are doing is an interesting concept, but state-run programs should be client-centric and less bureaucratic. We don’t yet know what the unintended consequences will be for small businesses or investors.

The concept of a state-run program is very different from that of a Self-Directed IRA. Self-Directed IRAs put you, the retirement investor (not a state- or federally-elected board), in the driver’s seat. You choose the right investments for your particular situation, and you consult with a team of professionals to ensure your long-term goals will be met. Employers can open a SEP or SIMPLE IRA, depending on the company’s size, which are usually cheaper alternatives to other workplace retirement plans and which can also be self-directed. For these reasons among others, Self-Directed IRAs will remain a viable alternative for employees without a workplace retirement plan.

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