State Mandates and the Adviser Opportunity

Qualified retirement plan fiduciaries and providers can feel like they’re on a rollercoaster of regulatory complexity.

Industry mandates constantly evolve. Amendments are made, rules are changed and the retirement plan providers including custodians, recordkeepers, third-party administrators, plan advisers and investment managers must endure the twists and turns. All this is in the name of fiduciary duty to the tens of millions of Americans who contribute to qualified retirement plans.

Tim Friday

While plans like the 401(k) have only grown in adoption over the years, many employers still shy away from offering a formal retirement plan to employees. Costs, complexity, fear of liability, lack of demand—all of these issues can factor into the decision, but, ultimately, it’s the worker that sits at the disadvantage. A 2022 AARP study found that nearly 57 million people—48% of American private sector employees ages 18 to 64—still do no’t have a retirement plan at work. The situation becomes even grimmer for those workers at smaller companies:  78% of workers at companies with fewer than 10 employees and 65% of those who work in companies with 10 to 24 employees lack access to a plan.

Several states are now stepping in to offer their solutions to rectify the “retirement gap” faced by almost half of American workers. California’s CalSavers is just one example, but today, at least a dozen states have retirement plan mandates, and it is only a matter of time before the federal government picks up the issue and sets rules of its own.

Rather than simply bracing for impact, retirement plan intermediaries should use this movement as an opportunity to present the right corporate retirement plan option to business owners who are being forced to consider state-mandated plans.

Acknowledge the Benefits

Part of identifying the opportunities presented by state-mandated retirement plans is first understanding how they may benefit American workers. There are certainly upsides that should be acknowledged. After all, any type of retirement savings is better than not having a nest egg, and with automatic enrollment for employees, more people will begin saving for retirement. This may help reduce America’s severe retirement savings gap, which could cost state and federal governments $1.3 trillion by 2040, according to research from the National Conference of State Legislatures.

While at the highest level, state-mandated plans allow employees to save for retirement even if they work for a company that does no’t offer a traditional plan, there are several other benefits. Plan portability, cost-effectiveness and regulatory oversight are just a few more of the potential advantages.

That’s not to say there are no flaws.

Know the Drawbacks

Employees enrolled in a state-mandated retirement plan are often limited in their investment options and could see lower returns as a result. They also do not reap the benefit of employer contributions, a substantial missed opportunity over time.  

Additionally, there are several drawbacks for employers who relegate employees to state-mandated plans. For starters, employers do no’t get the tax benefit of setting up a qualified retirement plan and deducting the expenses associated with creating and maintaining it. At the same time, employers are still on the hook to help pay for the administrative costs and participate in day-to-day plan management.

In fact, if an employer opts for a state-run plan like CalSavers, it would essentially be committed to a similar amount of work as when offering an employer-sponsored retirement plan. It would be solely responsible for processing payroll contributions, updating contribution rates and adding newly eligible employees.

It is important to note that even though an employer can limit certain fiduciary liability when participating in some state plans, it should be cautious and know that it may be subject to a state’s penalties for noncompliance with that government’s requirements. Employers also miss out on a very valuable recruiting and retention tool when they do not sponsor a retirement plan.

Educate Your Audience

The opportunity here is for plan advisers, providers and administrators to leverage this wave of state mandates to educate businesses on why they should sponsor a plan of their own. Use these mandates as a reason to reach out to clients and potential clients. It can be a retention tool or a smart tactic when earning new business. Walk clients through the intricacies of the state-mandated plans, as well as the benefits of sponsoring their own. They may quickly see the advantages.

As state-mandated retirement plans like CalSavers continue to proliferate, it is only a matter of time before they, in some shape or form, impact all Americans. Plan advisers and providers are missing out if they are not getting ahead of this trend.

These practitioners should be connecting with businesses to let them know they have two choices when it comes to giving their employees access to a qualified retirement plan. They can either form their own, understanding that yes, it’s going to cost time and money to administer, or they can be compelled into supporting a mandated plan that may not suit their needs, nor provide them with the boons associated with offering an employer-sponsored option. No tax benefits, no recruiting tool, no control.

There’s never been a more critical time for plan advisers and providers to have these conversations with clients and potential clients. Embrace the regulatory twists and turns and take advantage of this stretch of the coaster.

Tim Friday is president of AmericanTCS.