As States Add Retirement Programs, Private Providers See Growth

The dominos continue to fall when it comes to states offering retirement plans. On Monday, Minnesota Governor Tim Walz signed into law an automatic individual retirement account program, and earlier this year, Missouri brought on a voluntary multiple employer plan for small businesses while Vermont moved to a mandated auto-IRA from a voluntary multiple employer plan.

The additions bring the total number of states with state-facilitated retirement savings programs to 18 from 16 at the beginning of the year, according to Angela Antonelli, a research professor and executive director of Georgetown University’s Center for Retirement Initiatives, and she expects more states to come online.

“Historically, we usually see the adoption of one or two new state programs every year, so it is exciting that we already have two new programs with Missouri and Minnesota, which increases the total number of program states to 18,” Antonelli says. “We may still see one or two more new programs adopted before the end of 2023.”

The state plans, the majority of which come with retirement plan mandates, are a chance for some small plan providers to increase their business by working with the states—a position Ascensus and Vestwell have had with a number of programs. But the mandates are also potential competition for small plan providers, should employers choose a state’s auto-IRA instead of private options such as a digital 401(k) startup, a pooled employer plan or a simplified employee pension plan. As of April 30, the six state programs that report data are administering more than $839 million in assets, according to Antonelli.

For Ascensus, which provides 401(k) startup offerings and works with IRAs run by California and Illinois, state engagement with retirement plans is, for the most part, a business generator.

“We are always excited to see more [state-mandated plans] as a general effort to expand access to uncovered workers,” says Troy Montigney, vice president of state-facilitated retirement plans for Ascensus. “State mandates have had tremendous movement in bringing in 10s of thousands of employers in the cases of the ones we administer.”

Montigney says Ascensus  will consider partnerships with other states as they bring on mandated plans. He notes that, as more plans come online, they are faster and easier to implement due to processes and learning from earlier editions. In California, for instance, the state mandate was implemented in year-long waves, based on business size. Now, Montigney says Ascensus can offer an “abbreviated” schedule to bring on businesses of all sizes.

“Business community feedback in each state is very different,” Montigney says. “If states want it, we can help with operational efficiencies and cost savings opportunities by providing a more compressed timeframe.” 

Public vs. Private

But what about providers that aren’t in the running to service state-run plans? Even those providers note that, while some businesses may choose the state auto-IRA programs, the overall awareness and need brought by mandates will translate to more business for their services, particularly if they can put up better offerings.

“While there are some groups who may look at the options and select the state mandate solutions, I feel that is a small minority,” says Steve Scott, founder of and partner in Retirement Solution Group, based in Chicago. “At the end of the day, the state mandates are getting more employers to consider the qualified plan solutions than any other action I have seen, including the SECURE Act and SECURE 2.0. Most were considering it, but the mandate makes this more of a priority. So if they are going to take the time to look for a solution, we feel our offering is both competitive and functionally different than the state-run plans.”

Scott, whose firm offers a PEP option to small employers, believes the state mandates will ultimately increase interest in the relatively lower-cost, administratively efficient pooled offering. The adviser says that if the mandate gets employers to assess the market and the firm can be at the ready with competitive private market solutions that have more support, higher limits and more flexibility, the overall result will be continued growth.

“Many small business owners are not looking to extend their relationship with state government,” Scott says. “So opening a retirement account and doing more reporting through the state is not a desirable option to many small business owners I talk to.” 

Rakesh Mahajan, chief revenue officer for 401(k) startup firm Human Interest, has a similar take. State mandates are helpful in the sense of alerting all employers to sign up for retirement plans, but state plan offerings may not be the right choice for most businesses, Mahajan notes.

“It helps raise awareness of the need for having a retirement plan,” he says. “We find that businesses that opt out of the state plans are looking for an easier administration and desire to save more than state mandate plans allow.”

San Francisco-based Human Interest, which is booking about 1,000 new startup plans a month, does not necessarily see more business in states with mandates, says Mahajan, who oversees about 500 salespeople across the country.

The five states in which Human Interest has seen the most growth in 2023 include Florida, which does not have a state mandate, and California, which does, Mahajan notes.

A Rising Tide

Montigney of Ascensus says much of the initial concern about or opposition to mandated plans has faded as more employers bring on workplace retirement plans, either through the state option or via traditional offerings like 401(k)s. He notes a fundamental challenge future state plans could face: “It can be difficult to bring to scale when there is not the compulsory mandate coupled with it,” he says. 

The California and Illinois programs administered by Ascensus were paired with retirement savings mandates for employers; without one, a state may be hard-pressed to attract providers to bid on program administration services. 

Vestwell CEO Aaron Schumm says his New York-based 401(k) provider keeps up an “intense focus” on engaging with states about their retirement plans.

“We think that there is not only an expanded opportunity, but clearly a proven appetite for savers to engage,” says Schumm, whose Vestwell serves state plans in Connecticut, Maryland and Oregon. “When the states enact these programs, it also lifts the 401(k) side of our business. We are excited to be a part of that.”

Schumm notes that after Vermont’s initial MEP offering was not working out, the state decided to partner with the existing SECURE Choice option, which has already been proven successful. “We’re seeing more traction in states collaborating with one another to help grow the overall adoption of plans, and we think that trend will continue,” he says.

Schumm notes there is significant interest in SEP IRAs as well, and Vestwell is interested in helping with uptake of that quickly implemented, privately-run retirement plan option.

“Our ultimate goal is to get people saving,” he says.

Pew Charitable Trusts estimates place the national aggregate cost to support older Americans who do not have retirement savings or pension plans over the next 20 years at more than $1.3 trillion. According to Pew’s research, as many as 56 million private sector workers lack access to a retirement savings plan through their jobs.

Scott of Retirement Solution Group is looking even further down the road beyond state mandates: “The real question,” he says, “is: Will a future SECURE Act have a federal mandate?”

His thoughts on that outcome at some point in the future? “Inevitable.”

Additional reporting by Remy Samuels.