But don't worry. While policy wonks love the Australian model and ones similar to it, there appears to be little appetite here for adopting it. In states where a state-managed retirement plan has been advocated or approved, the plan is either strictly voluntary or workers can choose to opt out.
Investments can be low risk
Labor economist Teresa Ghilarducci defined the optimal characteristics of state retirement plans that like-minded supporters back. In a co-authored report sponsored by Demos, a nonprofit public policy think tank, she calls for pooling workers' money and investing it in low-risk, long-term investments. In fact, her proposed plan seeks a guaranteed 3 percent return or a return at least 1 percent above inflation, protecting workers from losing their savings to market fluctuations.
In the current investment environment, a combination of safety and a return above inflation is hard to achieve. States already implementing their plans have taken other approaches.
Connecticut is using target-date mutual fund investments, based on the age of the individual and number of years to retirement. Target-date funds generally contain a mix of stocks, bonds and cash. California is beginning its program with bond investments for the first three years. Bonds don't yield much these days and face considerable inflation risk.
"I applaud states like Connecticut that are offering options that give investors a real chance for good returns over a long period of time," says Kalen.
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Costs expected to be on the low side
Investment and management costs can really eat up the returns from private and employer-sponsored retirement plans. Potentially high fees discourage many companies from sponsoring these plans.
The goal of government-sponsored plans is to hold these costs down, says Geoffrey Sanzenbacher, research economist at the Center for Retirement Research at Boston College.
Sanzenbacher thinks that initially at least, the fees for these state-sponsored plans will be somewhere between 75 and 100 basis points (0.75 percent to 1 percent), which is on the high side compared with the fees charged by some large investment management companies.
"These plans are going to have communication issues, lots of small accounts and the mechanism of auto enrollment to deal with, so the cost may be higher than they are in some private sector investment companies," says Sanzenbacher. "But the cost probably will get down to 0.3 percent to 0.4 percent in the long run as the number of investors and the investment pools grow," he predicts.
Financial industry cites plans as cost-prohibitive
Not everyone is on board with state retirement plans.
"We think they are unworkable -- that they are in conflict with federal law and will be very difficult to administer," says John Mangan, regional vice president of state relations for the American Council of Life Insurers.
He points to three key objections from the financial industry, which manages traditional employer-sponsored retirement savings plans:
- They are costly to set up and could create significant expenses and liabilities for taxpayers.
- Employers, especially small businesses, could face operational costs and be subject to fiduciary responsibilities that they can't handle.
- Complex rules from the IRS and the Employee Retirement Income Security Act, better known as ERISA, add layers of responsibilities that neither states nor small employers are equipped to handle.
In August, the Department of Labor established a final rule to ease some of these concerns, offering guidance to states for avoiding ERISA violations.
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Another option already exists
Both the Center for Retirement Research at Boston College and the American Council of Life Insurers agree that a nationwide plan trumps having 50 state plans.
Mangan points to the federal MyRA, available since 2015, as a better option than state-sponsored plans.
MyRA plans can be set up by anyone through an employer or on their own. The maximum contribution is $5,500 per year in 2016 and 2017. For people age 50 and older, a $1,000 catch-up contribution is available, raising the maximum to $6,500 per year. Money can be automatically deducted from either a personal checking or savings account or via payroll deduction. You also can have a federal tax refund automatically deposited to the account.
The money is invested in special U.S. Savings Bonds with an interest rate equivalent to the Government Securities Investment Fund (G Fund) of the federal Thrift Savings Plan. That fund's one-year average annual return is slightly north of 2 percent. Once savings in a MyRA account reaches $15,000, it must be moved to a private-sector Roth IRA.
These plans could save taxpayers money
In the long run, Sanzenbacher and others who have studied state retirement plans and other options say the best thing about them is their ability to get reluctant savers over the hurdle and into a plan. The payback for taxpayers, he and others say, could be fewer participants who need access to safety-net programs such as Medicaid and Temporary Assistance for Needy Families (aka, food stamps).
But in the long run, these plans are good because they improve retirement for those whose resources are limited, Sanzenbacher says.
"It is nice to get to retirement with $25,000 or $30,000 in cash in case something happens. It's something that without a savings plan, people don't have," he says.
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