What’s your excuse for opposing state retirement initiatives, senator?
A Senate vote on House Joint Resolution 66 may come as early as tomorrow. H.R. 66 would put roadblocks in front of states setting up convenient low-cost individual retirement accounts (IRAs) for workers who aren’t covered under an employer-based plan such as a 401(k) or a traditional pension. These plans, sometimes called “Secure Choice” plans, are well advanced in many states, including California, Connecticut, Illinois, Maryland and Oregon. They’re designed to make it easy for workers whose employers don’t offer retirement plans—shockingly, around half of all workers—to contribute to low-cost IRAs through automatic payroll deductions. Workers who stand to benefit are disproportionately low-wage workers and small business employees.
Support for meddling with these useful, if limited, programs tends to split along party lines, though at least one Republican, Senator Bob Corker of Tennessee, has publicly opposed H.R. 66 and a similar bill and others appear on the fence.
Passage of the bill in a GOP-controlled Congress would belie the party’s claim to respect states’ rights. Republicans have historically supported retirement savings accounts, and the state plans only offer a low-cost, hassle-free way for uncovered workers to do something they can do already—contribute to an IRA. So why are some members of Congress trying to derail the state initiatives? They claim to be concerned about workers, but it should come as no surprise that the mutual fund industry is behind H.R. 66, presumably because state plans offering low-cost investment options could serve as a nudge to employers to rethink the high-cost funds they offer in their 401(k)s.
Employers have a fiduciary duty to offer appropriate investment options in 401(k)s. However, this has been narrowly interpreted as prohibiting exotic investments such as art work and other collectibles, not as a duty to offer lower-cost options, even when almost identical but lower-cost alternatives are available. Nevertheless, employers and savers are starting to recognize how high fees erode retirement savings, leading more to gravitate toward index funds and other low-cost investments. Investors have moved billions of dollars out of high-cost investments in the past year, much to Wall Street’s distress. This trend could accelerate if state plans offering low-cost options proliferate and even more people become aware of their advantages.
Of course, politicians are loath to admit they’re protecting industry profits at the expense of small savers, so lobbyists have come up with creative excuses for opposing the state plans, most of which boil down to claiming that they would undermine 401(k)s and other employer-sponsored plans. Since employer-sponsored plans, unlike most IRAs, are regulated under the Employee Retirement Income Security Act, this puts Republicans in the awkward position of claiming to support regulatory protections for workers.
Supporters of H.R. 66 correctly point out that an ideal 401(k) is better than a payroll-deduction IRA since contribution limits are higher and employers can contribute on behalf of workers. These advantages are precisely why it’s implausible that employers would drop 401(k)s in favor of enrolling workers in state plans. What’s much more likely is that workers whose friends or family members participate in the new state plans would pressure their employers to offer similar low-cost investment options in their 401(k)s. This is what the industry is afraid of and members of Congress who support this legislation are working to prevent.