Some states are crafting special accounts that they say will make it easier for tens of millions of people to save for retirement.
The House of Representatives passed resolutions this month that call for undoing a Labor Department rule to make it easier for states to move forward with the plans.
The resolutions now need to be voted on by the Senate.
The Labor Department rule was finalized last year and exempts the states from having to comply with the Employee Retirement Income Security Act (ERISA), the law that governs workplace retirement plans and pensions.
Supporters of the approach say the accounts could go a long way toward closing the retirement savings gap by addressing two of the biggest challenges that keep people from saving more: lack of access to an account and ease of use.
“Research after research has shown that the most successful way to get people to save is to put in provisions so that people don’t have to think about it,” said Jeremie Greer, vice president of policy and research for the Corporation for Enterprise Development, a nonprofit that focuses on helping low-income households build wealth.
However, the approach is facing resistance from Republicans and industry groups, including the Investment Company Institute and the Chamber of Commerce, who say they are worried the state-run plans may encourage some companies to ditch their own retirement plans.
Investing firms and Republicans say a better solution would be to make it easier for companies to open workplace accounts.
“We should be incentivizing 401(k)s,” said Rep. Francis Rooney (R-Fla.), who sponsored one of the resolutions. “Having the states get into these retirement funds may be going the other way.”
The state-run plans would lack some of the benefits offered through workplace accounts. For instance, employers cannot make matching contributions. Savers also cannot save as much in an IRA, which caps contributions at $5,500 a year, as they can in a workplace plan such as a 401(k), which has an annual limit of $18,000. (Those contribution limits grow for people 50 and older.)
Still, some consumer advocates say the state plans would help to fill gaps in the current retirement saving system.
About 55 million Americans don’t have a way to save for retirement through their regular paychecks, according to AARP. Although anybody can open an IRA on their own, workers are 15 times more likely to save when they have access to a plan through their jobs, the group found.
The groups advocating for the plans say that even if the accounts are not subject to ERISA, the states organizing the plans would offer oversight and consumer protections. For example, some of the states are creating boards that would choose the investment options and offer consumer protections — though management of the savings would be outsourced to a third-party investment firm.
“They would have better oversight than a traditional IRA, because each of these state plans has a board of trustees with public hearings and an open record,” said Teresa Ghilarducci, professor of economics at the New School for Social Research in New York. “You don’t have such promises from banks.”
More than 30 states are looking into creating retirement saving accounts, and at least seven states have passed laws to authorize the programs, according to AARP.
The states working to offer the accounts also have a fiscal incentive for boosting retirement savings. Consumers who don’t set aside enough money during their working years could face poverty in retirement, which may force them to rely on state-based aid programs such as Medicaid.
“Every dollar that isn’t saved is a dollar that is going to have to come out of the state budget,” said Tobias Read, the state treasurer for Oregon, which is on pace to launch its state-run IRA this summer.
Oregon intends to move forward with the retirement plan regardless of how the Senate acts, Read said. John Chiang, the state treasurer for California, said his state would continue to “fight back” the efforts to halt the accounts. Both men said eliminating the labor rule may make it difficult for states to proceed by not making it explicitly clear what rules employers and states must follow.
Earlier this month, 15 state treasurers sent a joint letter to Senate Majority Leader Mitch McConnell (R-Ky.) asking him to reject the resolution and protect states’ rights to offer the accounts.
In the letter, they said that the Labor Department rule “provides important flexibility to states and large municipalities as they seek to address the growing retirement crisis facing this country.”