Proposal for state-run option draws supporters and critics

 

By Dave DeWitte
dave@corridorbusiness.com

Iowa State Treasurer Mike Fitzgerald’s proposal to create a new retirement savings plan aims to address the savings shortfall among lower-earning Iowans by turning some existing retirement paradigms inside out.

His Retirement Savings Iowa proposal would require private businesses that don’t have a retirement savings plan to offer employees access to the state plan through payroll deduction. Employees wouldn’t have to do anything to be enrolled in the plan; in fact, they’d have to opt out of the “auto-IRA plan” if they didn’t want it.

Although required to offer the plan, private employers won’t be allowed to contribute to it. All the savings would come from the employees and would not be matched by an employer contribution.

Wages contributed to Retirement Savings Iowa would qualify for the same income tax deduction as a regular IRA (Individual Retirement Account), and would be able to grow tax-free until the individual reaches the age of mandatory withdrawals, Mr. Fitzgerald said.

The plan was proposed last month as Senate Study Bill 3164.

“Forty-two percent of people who work for private businesses in Iowa don’t even have access to a retirement plan,” Mr. Fitzgerald said. “That means they’re deprived of putting money in an account that provides tax-deferred growth for that individual through payroll deduction.”

A 2015 survey of baby boomers between the ages of 55-65 found a shortfall of $36,371 per year between the amount of retirement income their average savings of $136,200 could support, and the $45,500 they hope to have in annual retirement income. While Social Security can make up some of the retirement savings identified in the BlackRock CoRI Index 2025 study, most baby boomers will still face a wide gap.

Three in 10 Iowans over the age of 65 retire solely on Social Security for their retirement income, according to a study by AARP. It said the average Social Security benefit in Iowa is $14,894.

Mr. Fitzgerald says the Retirement Savings Iowa proposal has “really touched a nerve.” He’s heard from small businesses that can’t afford to set up their own retirement savings plan, and from members of the wealth management industry who think the state should stay out of their field.

To Mr. Fitzgerald, it seems obvious that the current retirement options just aren’t working for many people.

“Most people will say, ‘I can take 3 percent out of that paycheck and put it in my retirement savings,’” Mr. Fitzgerald said. “But if you wait until the end of the year, most people have already spent it, and they don’t have it to put in savings.”

The state would remove the administrative burden of having a retirement program from small employers, Mr. Fitzgerald said, and provide a large enough pool of investment funds to keep the costs of professional money management low.

Whether the proposal will go anywhere in the Iowa General Assembly is far from certain, however, as lobbyists for several of the state’s largest business advocacy organizations have registered in opposition. They include the Greater Des Moines Area Partnership, the Cedar Rapids Metro Economic Alliance and the Association of Business and Industry of Iowa (ABI).

“When we already have one of Iowa’s premier business organizations doing exactly what the treasurer would do, why get into competition?” said Myron Linn, lobbyist for the ABI.

Mr. Linn referred to Des Moines-based Principal Financial Group, one of the world’s largest investment companies focused on retirement savings. It opposes SSB 3164 and Retirement Savings Iowa in their present forms.

“While Principal supports increased access to retirement savings options for all Americans … we believe there are many low-cost savings options already available that don’t overload states with new financial and compliance burdens,” Principal said in an emailed statement.

AARP, the leading advocacy group for retirees, has been lobbying for state plans like the one proposed by Mr. Fitzgerald. That’s because of its research findings that Americans are falling further behind in their retirement savings as employers have shifted from traditional defined benefit plans to defined contribution plans.

With the former, employees were typically “vested” after a specific length of service, and could count on receiving a specific benefit until death after they achieved retirement eligibility. The latter includes 401(k) plans, in which employers often match a portion of employee contributions as an incentive to save retirement, but the amount they have to retire on depends mostly on how much they decide to contribute from each pay period.

“It [Retirement Savings Iowa] is not something that’s in competition with the different options available now,” AARP Iowa Associate State Director for Advocacy Anthony Carroll said. “This is a gap-filling mechanism.”

Mr. Carroll said AARP research has found that workers are 15 times more likely to save for retirement if they can do so through payroll deduction. While Retirement Savings Iowa does not induce employees to save by providing a matching employer contribution, Mr. Carroll said its “opt-out” feature is a powerful one for gaining participants.

Mr. Carroll does not agree that Retirement Savings Iowa would create additional regulatory headaches or costs for businesses. He said 42 percent of Iowans work for an employer without a retirement plan – a huge gap that Retirement Savings Iowa could fill.

“It’s one more checkoff – the state takes it from there,” he said.

Opponents aren’t convinced that it will work, however. Mr. Linn says that without an employer match, Retirement Savings Iowa “really doesn’t do anything to incent people to save.”

Retirement Savings Iowa would cost taxpayers $1.5 million to set up, but hardly anything after that, according to Mr. Fitzgerald, because the administrative costs would be recovered mainly from participants’ accounts.

He compared it to the College Savings Iowa program his office administers that allows voluntary savings for higher education to grow tax-free. More than 231,000 accounts have been set up, and over $4.1 billion saved to help young Iowans go to college.

“People still come up to me and say, “Mike, why didn’t you tell us about this sooner?” Mr. Fitzgerald said.

It appears unlikely that Retirement Savings Iowa will be passed into law anytime soon. At the time of publication, the bill had made its way out of subcommittee in the Senate Ways and Means Committee, but had not been discussed by the full committee.

Even if the bill makes it to a chamber-wide vote in the House and Senate, Mr. Fitzgerald said it cannot become law yet. The U.S. Department of Labor is still working out the rules that will allow for states to create opt-out retirement plans, he said. They will cover such issues as the percentage of an employee’s pay that can automatically be deducted unless the employee opts out.

Bills to create various kinds of state retirement programs to fill the retirement gap have been introduced in more than two dozen states at the urging of AARP and other backers, although none have yet taken effect because of the need to wait for DOL rules.

“This could be a long process where it takes a year or two to get it through, but it’s so needed,” Mr. Fitzgerald said. “If we don’t do anything for the people in our lower economic class, we’re all going to have to pay more when they retire.”