How do State Programs Change the Retirement Landscape?

How do State Programs Change the Retirement Landscape? Moderator: Sabrina Bailey, Senior Vice President, Northern Trust Asset Management Speakers: Sarah M. Gill, Senior Legislative Representative, AARP Angela M. Antonelli, Executive Director, Center for Retirement Initiatives, and Research Professor, Georgetown University Marla Kreindler, Partner, Morgan, Lewis & Bockius Christina Elliott, Acting Director, California Secure Choice

A Familiar Headline: Half of All Households At Risk 52 percent of households are at risk of not having enough to maintain their living standards in retirement, according to the Center on Retirement Research. Source: Center for Retirement Research, National Retirement Risk Index

Flipping the Script: Reaching Untapped Market Percent of US Households with Access to Savings Employer Sponsored Plan Only 29% IRA and Employer Sponsored Plan 32% IRA only 6% Do Not Have IRA: Untapped Market 33% of All US households Source: ICI

Access to Retirement Plans by Income- Not All Small Dollar Accounts U.S. PRIVATE SECTOR WORKERS: Does your employer offer a pension or retirement plan? By Personal Annual Income Source: NCPERS, Analysis of Current Population Survey, March 2011 Supplement

Rethinking the Access Profile Source: ICI

Solutions There are five essential ingredients that facilitate adequate retirement savings rates: availability, automatic enrollment, ease of investment, automatic escalation, and lifetime income streams. Action steps: Make retirement plans with payroll deduction available to all workers. Currently, 55 million US employees have no way to save for retirement at work. Increase participation and savings rates by changing the choice architecture of retirement plans, utilizing the findings of behavioral economics

Workers are 15x More Likely to Save if Employer Offers Plan Participation Rates 71.5% 4.6% Not covered by an Employer Plan - Deductible IRA Only Covered by an Employer Plan Data compiled by AARP s Public Policy Institute from unpublished estimates from the Employee Benefit Research Institute of the 2004 Survey of income and Program Participation Wave 7 Topical Module (2006 data). See also Brookings' Retirement Security Project and WhiteHouse.gov

529 Plans: A Model for Retirement? Source: College Savings Plan Network

All Boats Rise: 529 Plans Source: The College Savings Plan Network

A National Movement Begins: 2013

National Movement: Half the Country Taking Action

If You Build It They Will Come Small business owners overwhelmingly agree that retirement benefits help recruit good employees Percent Strongly or Somewhat Agree Offering retirement benefits helps recruitment of good employees 82 I feel a responsibility to provide some kind of retirement benefits 73 It would be nice to offer a retirement benefit but it's too expensive Offering a retirement benefit helps my company's bottom line 64 62 It would be nice to offer a retirement benefit but it's too complicated to administer 50 Data from NCPERS

If You Build It They Will Come The AARP 2015 New Jersey Work and Save Survey was conducted as a telephone survey among registered voters age 35-64 in New Jersey.

From Crisis to Opportunity For Innovation and Leadership Look to the States States Are Stepping Up To Address Retirement Security Goal To Design Simple, Low-Cost, Easily Accessible and Effective Savings Options

25 States Have Considered or Enacted Private Sector Retirement Initiatives

More than 20+ These States Acted in 2015 to Address Retirement Security States Program Enacted (5) States/Metro Legislation in 2015 (12) CALIFORNIA (2012) MASSACHUSETTS (2012) ILLINOIS (2015) OREGON (2015) WASHINGTON (2015) States Study in Progress (7) CONNECTICUT (2014) MINNESOTA (2014) VERMONT (2014) MARYLAND (2015) NEW YORK CITY (2015) UTAH (2015) VIRGINIA (2015) COLORADO (S) INDIANA KENTUCKY MAINE MARYLAND* MASSACHUSETTS (2) NEW HAMPSHIRE (S) NEW JERSEY NEW YORK CITY NORTH DAKOTA WEST VIRGINIA (S) WISCONSIN (S) *Task Force Report Completed in 2015 (S) study bill

Some Common Design Features (CA, IL, OR) PLAN DESIGN Mandatory, auto-enroll IRA (with opt-out) Default contribution Employer contributions generally not permitted Pooled and professionally managed funds Must keep fees low (.75%-1% range) Market analysis and legal analysis to guide design and management issues

Some Common Design Features (CA, IL, OR) ADMINISTRATIVE STUCTURE Retirement Board Management of trusts Limits of liability and fiduciary role for states and employers explicit

Massachusetts - 401(K) for Non-Profits Managed by the State Treasurer Voluntary participation by non-profit employers with 20 or fewer employees Defined contribution 401(k) plans Auto-enroll with opt-out Default contribution at 6% or can choose 4% with auto-escalation up to 10% Fees estimated to be well under 1% (20-80 bps)

Washington State Marketplace Model Managed by State Department of Commerce Voluntary participation for employers with less than 100 employees SIMPLE IRA, myra (Roth IRA), and payroll deduction IRAs and others can be added Employer contributions encouraged (ERISA plans encouraged) To be built and funded by private sector Fees cannot exceed 1%

Major Differences in Design Features Across All Plans x x x Federal Regulatory Oversight ERISA or non ERISA plan Account Structure IRA (traditional, Roth, or other options) 401(k) type plan Employer Participation Mandatory or voluntary Employee threshold (from 5 to 100) Employer contributions Penalties for non-compliance

Major Differences in Design Features Across All Plans x State Management Board (CA, IL, & OR) vs. state agency (WA & MA) x Implementation Study Requirements CA & OR must conduct analyses and go back to Legislature WA must have rules reviewed by Legislature IL & MA can implement as enacted Summer 2017 key target timeframe for launches

Implementation Issues & Challenges Funding Availability Market & Feasibility Analyses Role in Plan Design ERISA Uncertainty Outreach to Stakeholders Building and Managing the Program

Successful Reform Needs An Effective Sequencing Process Merton-Muralidhar (working paper) examines this approach for uncovered workers voluntary defined contribution (DC) reforms Understand Population Being Served (Legislature/ Technical Teams) Clearly State Objectives To Be Achieved (Legislature) Work With Design Features to Achieve Objective (Technical Teams/Board) Ongoing Evaluation and Revisions (Technical Teams/Board)

State Lessons Learned So Far Understand Target Populations and Needs Sooner Rather Than Later Engage Stakeholders Early and Often Define Overall Policy Goals and Objectives Design the Program to Meet Your Goals Be Prepared to Refine the Program Design Keep the Future in Mind How Will Success Be Measured?

DOL ERISA RULEMAKING: The $64,000 Question On July 31 st, 2015, the President Directed DOL to Issue Rules to "Provide a Clear Path for States to Create Retirement Savings Programs. DOL to issue proposed policy changes by end of 2015 with goal to finalize by end of 2016. Rulemaking will address 2 approaches: 1. Non-ERISA - Mandatory, auto-enroll IRAs Proposed rules expected to provide updated guidance on safe harbors that avoid ERISA preemption. 2. ERISA covered 401(k) defined contribution plans Proposed guidance will look at the use of the Multiple Employer Plan (MEP) arrangement by the state to facilitate plan formation and take burden off of employers, but maintain ERISA protections. ERISA applicability does not allow program to be mandatory for employers (ERISA plan can be an option in a marketplace model)

Georgetown Center for Retirement Initiatives McCourt School of Public Policy Website: cri.georgetown.edu Follow us on social media for updates: @cri_states

Broad Coalitions Support Action Supporters in Washington: Supporters in Illinois: American Council of Life Insurers Securities Industry and Financial Markets Association AARP TIAA- CREF Cabrera Capital Ariel Investments American Society of Pension Professionals and Actuaries Illinois Black Chamber of Commerce National Association of Women Business Owners AARP

Trends in program design: 401(k) plans vs. payroll deduction IRAs ERISA-covered 401(k) Plans Yes - DOL ERISA rules provide a pre-existing framework. Need to consider public entity s role in fiduciary governance or potential fiduciary outsourcing IRA Structure No? - if designed to limit employer involvement. (Awaiting additional DOL guidance.) Need to consider alternative provisions if ERISA does not apply, such as fiduciary standards and enforcement provisions. Employer contributions Can be included in the design Not under current DOL regs if seeking to exempt from ERISA coverage Subject to 4975 prohibited transaction rules Yes need to consider impact of proposed DOL fiduciary investment advice regs Institutional investment vehicles Same as 401(k) plans generally IRAs may not have the same range of investment structures. Based on current securities law exemptions No CITs? No stable value option Protected from employee insolvency Yes State by state analysis

Additional legal considerations: Consider leveraging economies of scale such as 457 or 529 programs to providing for institutional pricing and use of existing administrative structure Need to weigh the pros and cons of using form documents vs. custom legal documents How will principles of governmental immunity apply to the program? State law remedies? Remember that this is new ground and existing legal principles may not always fit in the same way

California s Retirement Landscape Over 7 million California workers lack access to workplace retirement savings plans. Non-white workers and women are disproportionately represented 64.7% are age 34 or younger 68.4% are Hispanic More than half work for employers with fewer than 100 employees. Median income is $25,000 annually

California Secure Choice Retirement Savings Trust Act of 2012 State administered payroll deduction savings program Mandatory for employers with 5 or more employees who offer no retirement savings plan Voluntary for employees automatic enrollment with opt out Portable, low cost, low risk

California Secure Choice Retirement Savings Trust Act of 2012 Market analysis and feasibility study required (to be conducted with donated funds) No implementation if: the IRA arrangements offered fail to qualify for favorable federal income tax treatment if it is determined the program is an employee benefit plan under ERISA If it is determined the plan will not be self-sustaining

Secure Choice Retirement Savings Investment Board John Chiang State Treasurer, Chair Ed De La Rosa CA State Senate Appointee Bill Sokol Governor Appointee Betty Yee State Controller Yvonne Walker CA State Assembly Appointee Marty Morgenstern Governor Appointee Michael Cohen Director of Finance Cindy Pollard Governor Appointee Heather Hooper Governor Appointee

Fundraising

2013-2014 Fundraising and Procurement Executed Contracts for the work: K&L Gates tax and ERISA legal work Overture Financial Market Analysis, Feasibility, Program Design. The team includes: Segal Consulting Greenwald and Associates UC Berkeley Center for Labor Research and Education Bridgepoint Group

2015 Market Analysis, Feasibility Study, DOL Proposed Rulemaking, etc. Conversations with the U.S. Department of Labor The study approach Secure Choice listening tour Engagement efforts with Office of Management and Budget Capitol Hill Policy Staff meetings (Oct 7 th ) IRS Tax Treatment

Research Findings Population behavior Two-prong approach Access to funds Contribution rates

Questions? http://www.treasurer.ca.gov/scib/ Christina Elliott, Acting Executive Director (916) 653-4046