In July 2014 the Zeeks Pizza restaurant in Issaquah, Washington, was the setting for an unusual meeting. The home of birthday parties, happy hours and slice-of-the-day specials like Friday’s Frog Belly Green, Zeeks became the site of critical negotiations between two Democratic state legislators and three officials from the Securities Industry and Financial Markets Association.
State senator Mark Mullet, Zeeks’ owner, and state representative Larry Springer were hosting a meeting with SIFMA national counsels Marin Gibson and Lisa Bleier, joined by Bill Stauffacher, an independent lobbyist who represents SIFMA. Gibson and Bleier had flown in from New York and Washington, D.C., respectively, to hammer out the shape of a new statewide retirement savings program for the estimated 1.5 million private sector workers in Washington State with no access to a workplace savings plan.
Mullet, a former currency options trader whose first attempt at a bill was defeated earlier that year — joining previous versions stretching back to 2007 — was eager to get legislation passed. SIFMA, which represents hundreds of securities firms, banks and asset managers, along with other industry associations, had been using its considerable muscle in the Evergreen State, as it has in California, Illinois and other places, to block a growing movement to establish state-sponsored retirement plans. As the group dug into the house-favorite pizza, a large Puget Pounder, Mullet had one big item left on his retirement plan wish list: no administrative fees for small-business owners.
He had spent months working with the SIFMA team in his effort to pass a bill that would create a retirement offering for small employers. He originally wanted a single pooled plan modeled on the state public retirement system’s defined contribution plan, including auto-enrollment. “That idea got shot down,” says Mullet, 42, the first Democrat elected to the Washington State Senate from the Fifth Legislative District, a largely rural area east of Seattle, since 1992. “SIFMA didn’t like the bill because it had a state component.” The industry group also refused to accept auto-enrollment. “SIFMA said, ‘We don’t think it’s federally legal, and we can’t support it,’” he explains. “I had to tailor my legislation until it was something they could support.”
The two-hour pizza party — quite a change from the typical 15-minute lobbying meetings in the Olympia state capitol — was a turning point in the senator’s battle to create an affordable plan for Washington State employers. Though almost none of Mullet’s goals was achieved, after months of negotiation SIFMA finally accepted the legislator’s new concept for a small-business marketplace with no employer mandate, no auto-enrollment and no pooling of employee assets. The marketplace would exclude any employer with more than 100 employees and would comprise IRA products. In the end, SIFMA did sign off on Mullet’s fee requests: no additional administrative payroll-deduction costs to employers and participant fund management fees of less than 100 basis points, or 1 percent.
“After the July meeting the whole dialogue changed,” Mullet says. With SIFMA on board, big asset managers like Vanguard Group and industry organizations like the American Council of Life Insurers (ACLI) began to pay attention. Comments and amendment requests piled up on Mullet’s desk from July 2014 until agreement was reached in the final days of the legislative session, on April 22, 2015. The senator notes, “It’s hard to pass a bill if there’s a group out there that says, ‘This idea sucks.’”
The battle to provide retirement income security to the 43 million-strong U.S. private sector workforce without a savings plan has been heating up across the nation as advocates square off with financial industry associations, retirement plan providers and, ultimately, Republican state legislators. On every front where Democratic legislators and other retirement security advocates are working to build a system for a workforce that ranges from housekeepers and waitresses to professionals and entrepreneurs, the financial services industry has been hard at work to suppress it.
The multitrillion-dollar industry has the muscle and will to go many rounds in its fight to defend a status quo that includes IRAs and the many flavors of defined contribution plans and outsourced products. But despite aggressive attempts to beat back state bill sponsors, the industry has had to come to grips with the growing possibility of a patchwork of new retirement plans that could require it to comply with as many as 50 different sets of rules and regulations. As challenging as that might be, the biggest fears among financial services providers are that the new state plans will disintermediate their business model.
When pressed, as in the ongoing California state initiative sponsored by state senator Kevin de León in 2012, some organizations will even deny there is a looming retirement crisis in which half of the U.S. workforce has no access to a workplace plan.
“The gap in retirement plan coverage that motivated the legislation is more perceived than real,” wrote the Investment Company Institute in a November 2013 response to a request for information from Grant Boyken, then pension and benefits officer in the California state treasurer’s office. Washington, D.C.–based ICI is the national association for the fund industry; its members manage a whopping $7.1 trillion in retirement savings assets in both defined contribution plans and IRAs. By ICI’s reckoning, 60 percent of full-time employees between 30 and 64 years of age participate in a retirement plan. ICI didn’t comment on the 40 percent without a plan. “The available evidence does not indicate a compelling reason for state government entrance into this marketplace,” it concludes.
But ICI’s written response to the California official makes clear the rationale for denying uncovered workers a retirement plan: “A state-run retirement plan for private-sector employees would unfairly compete with private businesses in California.”
The insurance industry has been among the staunchest opponents of new retirement plans. “There’s product availability everywhere,” says Alane Dent, head of federal relations, taxes and retirement security for the ACLI in Washington, D.C. “We’re one of those knocking on the door to say we have products — 401(k), SEP and Simple IRAs with safe-harbor payroll deduction.”
As threats to the financial services sector’s traditional business model have increased alarm, some within the industry are pushing for alternatives. Robert Reynolds, CEO of Boston-based Putnam Investments and Greenwood Village, Colorado–based Great-West Financial, has been developing a national plan through the latter’s Empower unit. Created through the 2014 combination of Putnam’s retirement business and J.P. Morgan Retirement Plan Services, Empower has more than 7.3 million plan participants. An outspoken supporter of retirement security, Reynolds represents the largest plan provider and recordkeeper that would speak to Institutional Investor for this article. BlackRock, Fidelity Investments and Vanguard all declined to express their views on statewide retirement plans.
Because of the lack of bipartisan agreement in the U.S. Congress, Reynolds has not been able to move a national plan onto center stage. So it’s been left to state legislators like Mullet to do it themselves. Mullet’s quest for a statewide retirement benefit began in 2007, when he gave up a 12-year career as a global currency options trader at Bank of America Corp. in New York and UBS in London to return to his home state. Mullet came back to Washington for a quieter lifestyle and settled in Issaquah, a comfortable suburb 17 miles east of Seattle, to raise his four daughters. He became the owner of both a Zeeks Pizza restaurant and a Ben & Jerry’s ice cream parlor — solid businesses with annual sales of about $1.6 million and $300,000, respectively.
It turned out that switching careers was the easy part. One of the most difficult tasks for the new entrepreneur was finding a retirement plan that would be affordable for both its sponsor and his 50 employees. “I started calling around and was surprised at how high the administrative fees for payroll deduction were,” Mullet recalls. Another surprise: The cost was about 200 basis points for each employee. When he heard of an earlier effort in the state legislature to start a retirement plan that would piggyback on the giant state public employee pension fund, his third career — public servant — was born.
Mullet enrolled at the University of Washington, earning a master’s degree in public affairs in 2008. The next year he ran for and won a seat on the Issaquah City Council. In November 2012 he was elected to the state senate with a 54 percent majority, catapulting him onto the small-business retirement plan battlefield.
After winning his senatorial election, Mullet wanted to create a retirement plan for all of his state’s private sector workers with no access to one. At first, he envisioned the Washington State Investment Board, which manages the public employee pension fund, providing an inexpensive outsourced solution with the same target date fund array it offered to public employees. To get there he introduced a retirement plan bill along with Republican senator Don Benton in January 2014.
SIFMA eventually accepted a much weaker proposal. Rather than a pooled, low-cost investment vehicle such as those at large private and public employers, Washington would offer a small-business retirement marketplace made up of payroll-deduction IRA-type funds for employers with fewer than 100 workers. Because it won’t be mandatory for employers to sign on, there will be a big selling job ahead to achieve Mullet’s goal.
By the time the senator introduced his first bill, Illinois legislators were well along in their efforts to establish a statewide retirement plan. On April 9, 2014, the Illinois senate passed its own bill establishing a retirement program for private sector employees, and set off a battle as trade associations like SIFMA and ACLI pushed for changes. “The most dug-in opponents weren’t prepared to negotiate,” explains Illinois state senator Daniel Biss, the bill’s sponsor. “They didn’t want to talk. They wanted to win.”
THE QUEST TO ACHIEVE retirement income security for the U.S. workforce led to a pairing of unlikely bedfellows — and the birth of a concept for a nationwide retirement savings program. In 2005, J. Mark Iwry, then a senior fellow at centrist think tank the Brookings Institution, and David John, a senior research fellow at the conservative Heritage Foundation, met at an event put on by the Employee Benefit Research Institute (EBRI). From that fortuitous beginning “we negotiated our differences and worked it out together,” says John, now a senior strategic policy adviser specializing in pension and retirement savings issues at the AARP Public Policy Institute and a nonresident fellow at Brookings. Soon after establishing their informal partnership, Iwry and John began to be invited as a duo to hearings on Capitol Hill “to disagree and provide entertainment,” quips John. “We’d finish the other’s sentence.” But their relationship helped lay the groundwork for a bipartisan solution to retirement security.
On Valentine’s Day 2006, Iwry and John unveiled their Automatic IRA program at the Heritage Foundation. In the 2008 presidential campaign, Iwry was tapped by Obama while John consulted with Republican candidate John McCain. Hopes were high when both presidential candidates supported the Automatic IRA. In April 2009, after Obama was elected, Iwry was appointed by then–Treasury secretary Timothy Geithner to a new role as senior adviser and deputy assistant secretary for retirement and health policy. It was his second tour of duty at Treasury; the first was during the Clinton administration, as benefits tax counsel.
Next came Iwry and John’s July 2009 paper, “Pursuing Universal Retirement Security Through Automatic IRAs,” in which the two described “78 million people with no way to save for the day when they stop collecting a paycheck.” The authors emphasized that “making saving easier by making it automatic has been shown to be remarkably effective at boosting participation in 401(k) plans, but they are of no use to the millions of U.S. workers who are not offered a 401(k) or any other type of employer-sponsored plan.”
The Automatic IRA has been submitted in every federal budget since 2009 but has yet to pass. The reason, John says, is that the mandated individual participation requirement in the Patient Protection and Affordable Care Act was confused by opponents with the employer mandate in the Auto IRA. That provision is for companies with more than ten employees to automatically enroll them with the ability to opt out. The Treasury Department estimates that if the Auto IRA were enacted today, 30 million additional families would be saving for retirement.
“Mandates are anathema to this Congress,” says Michael Hadley, an ERISA attorney and partner at Davis & Harman in Washington, D.C. Proving that hope is eternal, the current Auto IRA bill is part of legislation sponsored by Rhode Island Senator Sheldon Whitehouse and Massachusetts Representative Richard Neal, both Democrats.
Iwry points to the similarity between the Auto IRA and some of the plans now being proposed by states. “Most of the state-based proposals that we’ve seen are copies,” he says. If the federal Auto IRA proposal were enacted, Iwry adds, it’s doubtful that the states would have the same level of interest.
With the Automatic IRA yet to be adopted by Congress, the states have fallen back on their own resources to get the job done. And the need is great when one considers that the primary factor determining whether middle-class families save for retirement is the existence of a workplace plan. EBRI data shows that workers earning between $30,000 and $50,000 per year are 15 times more likely to save at work than set up an IRA on their own.
The most-sophisticated small employers, like Mullet, are asking for help. James Racheff is a small-business owner whose search for an affordable and simple retirement savings plan to offer his employees led to his support for Maryland’s state initiative. Racheff started Data Management Services, known as DMS, in Frederick, Maryland, in 1981 to help scientists design experiments and manage their data. As the company grew from 12 to 75 employees, Racheff, now chairman and CEO, says, “We wanted a mechanism for them to put money away for retirement.”
At first, Racheff hoped to set up a traditional defined benefit pension. “You just can’t do that anymore,” he says. He discovered that the amount of regulation to do so was far too arduous for a small-business owner. Using the quantitative experts at DMS, Racheff researched other plans and providers. “I spent week after week crafting a plan with the best options,” he says. Finally, he set up a 401(k) plan with Voya Financial Advisors, formerly ING Financial Partners’ broker-dealer arm. As the number of employees in the plan grew, investment options opened up and fees came down. As soon as the plan topped $10 million in assets, Racheff’s phone began to ring with plan vendors looking for a new account. “You have two to three employees, and the phone’s not ringing,” he notes.
In 2011, Racheff joined a new group, called Maryland Business, to lobby policymakers to address the needs of small-business owners. In 2013, AARP contacted him to help tackle the lack of retirement plan options for small businesses, many of which can’t afford the time and money it takes to set up a plan and are overwhelmed by the plethora of products. The result: 1 million full-time working citizens in Maryland don’t have access to a retirement plan. “I think about it as a moral responsibility for people living in our community,” says Racheff, now chairman of the advocacy group.
Maryland state senator Richard Madaleno, a Democrat, learned about the idea of a mandatory statewide retirement savings account — with lower fees as the number of participants grows — at a National Press Club meeting in 2013. Vice chairman of the senate budget and taxation committee, Madaleno sees plan design parallels with the state’s 529 program, through which many people are investing tax-free to fund their children’s future college education.
He says one of the biggest hurdles to achieving the goal is finding a way to comply with ERISA, the Employee Retirement Income Security Act of 1974, which was intended to protect the defined benefit pensions of private sector employees. Opponents in the financial services world make liberal use of this potential roadblock. And it is the primary reason that IRAs are becoming a default vehicle in state plans (see also "Hank Kim Offers States a Secure Retirement").
“ERISA seems to be like interpreting a religious text from 500 years ago,” jokes Madaleno, expressing what many feel about this obstacle to the enactment of statewide plans. “We’re trying to figure out what exactly are the questions we need to resolve in the legislation so we don’t run afoul of ERISA.”
ON MARCH 27, 2014, CALIFORNIA State senator Kevin de León stood at the front of a small lecture hall at the UCLA Anderson School of Management. His purpose: to engage several financial services firms in crafting a new retirement plan for the 8.6 million workers in his state with no coverage.
Now president pro tempore of the California senate, de León had invited representatives from seven of the largest financial firms to the California Secure Choice Symposium. Academics including UCLA professor Shlomo Benartzi, a behavioral finance expert, were also present at the event to discuss next steps for the California Secure Choice Retirement Savings Trust Act bill, sponsored by de León and passed 18 months earlier.
Raised in a San Diego barrio by an immigrant mother who, along with his aunt, spent her entire working life as a housekeeper with no benefits, de León kicked off the meeting with some stark statistics: 50 percent of middle-income workers nationwide will retire into poverty because they have no savings. “There is a financial tsunami on the horizon,” said the senator, a former educator and community organizer. “It will affect taxpayers. We need to act in a very aggressive way.”
Firms like Franklin Templeton Investments, Prudential Financial and TIAA-CREF brought their PowerPoint presentations to the Los Angeles campus — a sign of the realization by some of the potential largesse that millions of new retirement plan participants could yield. They have only to look to the U.K., where an auto-enrollment retirement program began in October 2012: 3 million participants have entered the new system through a phased rollout, with an additional 5 million to 6 million yet to sign on. Retirement plan providers large and small have queued up to offer plans.
When her turn came to address symposium attendees, Kristi Mitchem, head of the Americas institutional client group at State Street Global Advisors, which oversees $300 billion in individual-employer-sponsored retirement plans, expressed some of her concerns. Noting that “the great divide [in plan sponsorship] is around employer size,” she said, “we need an ERISA safe harbor that allows people to pool their assets together.” She suggested that multiple-employer plans might be one way to approach that goal.
SSgA’s Mitchem was followed by senior retirement executives from TIAA-CREF and Aon Hewitt, among others, who provided suggestions on how a statewide plan should be structured. Ideas were appropriated from the best of defined benefit and defined contribution plans, including guaranteed income options, pools of participants, portability, flexibility, liquidity and professional asset allocation and management. “They saw us as one of the few financial services firms that are full-throated in support of this,” says Timothy Lane, head of government market at TIAA-CREF in New York. “Our experience has been that there is incalculable value in an employer-facilitated plan.”
Lately, Lane has been on the road talking up the state plan initiatives with a diverse group that includes New York State Comptroller Thomas DiNapoli, New York Governor Andrew Cuomo and the National Association of State Treasurers. “I think there’s a lot of confusing products out there,” he says. “The intent of these programs is that they’re not confusing. They become the thing to do.”
But Lane and TIAA-CREF are firmly in the minority among firms that sell their own plans to individuals and employers across the U.S. “There is concern that the state is stepping in as a service provider in what is already a vibrant market,” notes ERISA attorney Hadley, who was hired by one plan vendor to assess whether state plans run afoul of federal law. Hadley is referring to the argument that the financial services industry already offers enough products, so there is no need for new ones from government.
Daniel Biss — the Democratic Illinois state senator who sponsored the bill that passed after 17 amendments dictated by financial services groups — recounts the headwinds he faced. “All sorts of industry entities opposed the bill,” explains Biss, who has a Ph.D. in mathematics from Massachusetts Institute of Technology and taught at the University of Chicago before joining the state legislature in 2011. “They were very aggressive with legislators. They thought they had us beat, that this was a silly pipe dream that wasn’t going anywhere.” Although Biss ultimately prevailed, he says one of the concessions made to the financial services industry was especially painful: to limit retirement plan access to businesses with at least 25 employees.
John Mangan, a regional vice president of the American Council of Life Insurers who covers Western state relations from his office in Las Vegas, has worked on influencing bills in California, Oregon and Washington. Firmly in the opposition camp since the first attempt, in 2007, to establish a retirement plan in Washington State, Mangan says he is far from alone: Other groups against state-sponsored offerings include the National Federation of Independent Business, National Retail Federation and National Restaurant Association, as well as various farm bureaus and chambers of commerce.
“The facts are not always as presented,” the lobbyist explains, speaking of state plan advocates. “We questioned their accuracy.”
Mangan challenges the assertion that individuals at small companies don’t have access to retirement plans. “We know they are eligible to buy an IRA,” he says. “We think access is widespread. They can save if they have money and want to save.”
Mangan also disputes the contention that state plans will be cheaper, easier and without cost to employers. “It is going to cost the state, and it will probably be an ERISA plan,” he says. “Someone will have to be liable — the state and employers.” He adds that proponents’ assertion that there are no costs or liabilities to state plans is based on the premise that they won’t be subject to ERISA. If that isn’t correct, as Mangan believes, “it will be like any other plan we are offering and most likely not cheaper or easier.”
SIFMA also likes to play the ERISA card. Washington State officials “thought they could run the plans like public ones,” says associate general counsel Gibson, who worked with state senator Mullet on the scheme that was ultimately reduced to a fund marketplace. “That would be a significant hit for state taxpayers. But that [approach] died; it was killed. The approach they are taking is a really good one.” Retirement security advocates say Washington’s marketplace has been the only plan to win SIFMA approval because it is not actually a retirement plan and uses currently available industry products.
One new vehicle has the full support of the financial services industry: my Retirement Account, better known as myRA, which was created by the U.S. Treasury under Iwry’s aegis and invests in a variable-rate Treasury security similar to the government securities fund offered to federal employees. Employers — as well as any state marketplace or state pension fund — can offer myRA; it will be included in the new Washington State small-business marketplace. Asset managers like that myRA doesn’t compete with other retirement products and is designed as a conduit to investment in mutual funds or other commercial retirement products when an account hits the $5,000 mark. “We are excited for that program to roll out,” says ACLI’s Dent. Adds SIFMA’s Gibson, “MyRA is better for savers than a patchwork of state plans.”
AS STATES LIKE WASHINGTON AND ILLINOIS pass retirement plan legislation, the financial services industry is beginning to show a willingness to join the conversation. “We’re closer than we were yesterday,” says Great-West Financial’s Reynolds of the chance for a national retirement plan like the Auto IRA or the scheme that his firm’s Empower subsidiary is developing. Most retirement fund providers, however, are looking to offer their own products rather than conform to a new plan design.
Legg Mason head of retirement sales Gary Kleinschmidt opposed state-provided plans when he first heard of them. In 2013, Maryland State Senator James Rosapepe appointed Kleinschmidt to the state’s retirement fund task force as an industry representative. Rosapepe, the original sponsor of the Maryland retirement bill, was looking for a defined-benefit-type scheme, but “it morphed into the same product we’re working on,” says Kleinschmidt, referring to Legg Mason’s EZ-IRA, which includes an outsourced payroll-deduction IRA and an adviser to provide enrollment meetings.
“We are in favor of state legislation provided it has the flexibility to allow using a private sector solution,” says Jeff Masom, co-head of U.S. sales for Baltimore-based Legg Mason. “We want to endorse something fair and equitable, like our EZ-IRA.” The Legg Mason team envisions a 150-basis-point fee that would be passed on to participants with a $5 monthly recordkeeping charge. “We think we can get between 10 million and 20 million people through payroll deduction with Cennairus,” says Kleinschmidt, referring to Legg Mason’s partnership with a Sarasota, Florida, insurance firm.
Another possible solution that some investment firms with large separate-account retirement practices point to is a multiple-employer 401(k) plan jointly sponsored by unrelated companies. The advantage of these arrangements over a system of individual IRAs, SSgA’s Mitchem says, is the reduced cost of both administration and investment for employers and employees. Although such schemes already exist through trade groups like the American Bar Association and the National Rural Electric Cooperative Association, the Department of Labor would need to bless their use in a statewide open plan.
Bennett Kleinberg, Prudential Financial’s point man for innovation in its retirement division’s institutional investment solutions practice, is a big believer in the importance of state-sponsored plans. Kleinberg, who like Mitchem presented at the California Secure Choice Symposium in March 2014, would like to see these plans include lifetime income. “We want to participate in any way we can,” he says, envisioning a plan with the best of defined contribution and defined benefit: automatic payroll deduction, auto-enrollment, auto-escalation, a default contribution rate and default investment options. Kleinberg is concerned about states adopting an IRA rather than a complete federal program that would include ERISA protection.
For its part the DoL has engaged with a number of representatives seeking state plans as part of its goal to provide better retirement security for U.S. workers. Secretary Thomas Perez and Phyllis Borzi, assistant secretary for the Employee Benefits Security Administration, have expressed interest in helping states work on retirement plans. Borzi has held many conversations with states regarding ERISA compliance. Kathleen Kennedy Townsend, a former Maryland lieutenant governor who chaired the first state retirement task force, has spoken with Borzi on the subject. Townsend’s team expects to reintroduce a proposal in January, at the start of the next legislative session. “Should where you work determine whether you have a retirement plan?” asks Townsend, who is a managing director at Washington, D.C.–based investment firm Rock Creek Group and launched the Center for Retirement Initiatives at Georgetown University in 2014.
To support and develop the state plans, the DoL has requested $6.5 million from the federal budget to fund pilot programs. The project would develop plans that have the best chance of achieving their goals and evaluate the effectiveness of each project in expanding coverage, says a spokesman for Borzi.
In a joint effort to turn the statewide retirement plans into reality, on May 18, 26 members of the U.S. Senate Finance and Health, Education, Labor and Pensions (HELP) Committees petitioned President Obama to work with DoL and Treasury to remove any uncertainty related to ERISA. They also requested that the new plans receive tax-preferred treatment at the federal level.
That same day Washington Governor Jay Inslee signed the Small Business Retirement Marketplace bill into law. Back in Issaquah, senator Mullet is gearing up to promote his small-employer plan. “We’re going to market the hell out of it,” he says. “We want to get tens of thousands of people in this plan as quickly as possible.”
More than a dozen private foundations have expressed interest in donating as much as $1 million in total to get the word out. Mullet plans to feature the marketplace on the home pages of every state agency that small employers visit for things like filing sales tax or workers’ compensation claims. Another plan: to give business owners $5 for each employee they sign up. “That’s how we’re going to move the needle,” the senator says. •