WA is 1st State to Offer Retirement Plans for All Residents

The State of Washington this year became the first state to begin a state-run retirement plan available to all WA workers and businesses. The idea is to lower administrative costs and provide access to a retirement plan for employees of businesses that don’t offer a plan. Businesses can also participate. There is a choice of several providers and there is no minimum investment. The plan can be funded by employer payroll deductions or from a person’s bank account.

You will likely see states adopt these now that the Dept. of Labor has issued proposed guidelines for state-run plans http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=28540&AgencyId=8&DocumentType=3.

The main objection is that the U.S. might end up with a patchwork of regulations on these plans that may differ. Currently, plan regulation is primarily done on a federal level according to laws passed by the U.S. government and regulations from the U.S. Dept. of Labor and I.R.S. Another objection is that participants can already open an IRA to save for retirement, so this may not change retirement savings much.

Amazingly, the WA plan only requires providers to offer two options – a list of target date or similar funds and a balanced fund. But, ERISA Sec. 404(c) requires that a plan offer a “broad range of investment alternatives.” This can be satisfied by having at least three options with materially different risk and return characteristics so that participants have both the ability to be aggressive and to reduce risk. It doesn’t appear that the WA plan matches up with that simple requirement. I don’t think a list of target date funds and a balanced fund can be considered a broad range of investment alternatives. For example, there is no stable value option or lower risk bond funds offered to significantly reduce risk.

Still, this is the beginning of a trend you will likely see more of because a long list of states are working on similar plans and a few have already passed legislation to allow this but have not yet rolled out the plan.