ICI Tells California to Halt State-Run Retirement Plan

Blass noted in the letter that while ICI shares “the state’s objective of increasing retirement plan coverage for private-sector workers,” the goal “must be achieved in a cost-effective way that reflects the realities of the work force and retirement savings.”

Unfortunately, he adds, “the state is relying upon a flawed report in evaluating the program. California’s workers and taxpayers deserve a clear, complete analysis of the program — including all the likely scenarios that could increase costs and liabilities — before it is implemented.”

Even under the report’s assumptions, ICI notes, California’s proposed retirement plan would cost participants an annual fee of 100 basis points, more than the vast majority of mutual funds holding private-sector IRA assets. The statement from ICI, a lobbying group for mutual funds and ETFs, says that the Overture report:

• Fails to fully capture the increase in costs if more workers opt out of coverage. The plan contemplates requiring employers that have elected not to offer their own retirement plans to automatically enroll workers in payroll-deduction IRAs. ICI says the private sector’s success with auto-enrollment in retirement plans isn’t likely to carry over to the state-run program.

• Assumes contribution rates that are not supported by survey data.

  The Overture analysis assumes workers will contribute 5% of their pay to Secure Choice IRAs. In survey data presented in the report, however, 64% of eligible workers said they were likely to contribute less than $100 a month — including 44% who would contribute less than $50. Based on respondents’ maximum likely contributions, the average annual contribution would range from $1,000 to about $1,700 — well below the $2,000 average account balance that Overture projects after the first year.

• Overlooks incentives that could increase leakage from program IRAs.

  The Overture report assumes that participants would be expected to pay a total fee of 100 basis points to cover operating expenses and recoup the program’s startup costs. ICI states that 90% of equity mutual fund assets in private-sector IRAs are in funds that charge less than 100 basis points in operating expenses — and that private-sector IRAs offer more investment choices than the state-run plan contemplates.

• Fails to consider all the costs of the program.

  The Overture report does not appear to take into account the costs of enforcing employer participation, compliance with the program’s rules, ensuring that workers are eligible to participate, or auditing the program, ICI states.

  The report also fails to consider the full costs of providing participant education, account statements and other communications.

Blass argues that a “more effective approach” to enhance retirement coverage would build upon the national, voluntary private-sector system of tax-deferred employer plans. “Simple reforms on a national level can make retirement plans less costly and more attractive to employers, particularly smaller businesses, that don’t offer plans today.”

Other industry trade groups have taken issue with the Department of Labor’s plan to boost workers’ access to retirement plans through state-run programs. DOL released on Nov. 16 a proposed rule and interpretive bulletin to help guide states in developing state-run retirement plans that don’t run afoul of the Employee Retirement Income Security Act.

— Check out SIFMA, ICI Balk at DOL’s State-Run Retirement Plan on ThinkAdvisor.