Government regulation
may be creating future business opportunities for advisors — although, in some
cases, a long way off.
California, Oregon, Illinois and other states are
instituting state-mandated automatic IRAs for businesses that do not offer
their employees retirement plans. The programs, which are being implemented in
stages, have the potential to push millions of Americans into saving for
retirement, putting a dent in the nation’s retirement savings crisis.
It may also create both short-term and long-term tailwinds
for advisors’ practices. Small business owners may seek out advice on how to
handle new state regulations and navigate retirement plan options. And should
workers’ savings pile up in the years ahead, they may need professional help to
manage their investments.
The programs are still young, but the impact may be huge,
especially as more states move to adopt similar measures. About 7 million
Californians could be eligible to participate in the state’s program, according
to Georgetown University’s McCourt School of Public Policy.
“I think it’s a great program. There’s a lot of potential
there to help people,” says Frank Paré, founder of PF Wealth Management in
Oakland, California. “At the end of the day, the challenge will remain to what
extent financial planners can continue to support the program. It’s those
individuals who need financial planners the most.”
Added responsibilities
The programs currently being implemented are similar in
design, but have some differences in requirements and eligibility. Oregon,
Illinois and California enroll workers in a Roth IRA at a 5% default
contribution rate.
While Oregon will eventually require all employers that do
not offer qualified plans to sign up their employees, Illinois’ threshold is
employers that have been in business for at least two years and have 25 or more
employees.
Under California’s program, employers that do not offer a
retirement plan and have more than 100 employees are currently required to
register for CalSavers. Registration requirements will tighten in the months
and years ahead; employers with 50 or more employees have to register by June
30, 2021 and those with 5 or more employees have to sign up by June 30, 2022,
according to the program’s website.
Some California-based advisors have found that their clients
who are small business owners need help in sorting out their options.
“The rollout of this plan has acted as a tipping point,”
says Nick Pennino, an Edward Jones advisor based in Hermosa Beach.
Pennino, an advisor for 21 years, says he’s received calls
from some clients wanting his insights. “Those [small business] owners thrive
in whatever their speciality is, and that’s not a 401(k) plan. That’s one of
those added responsibilities that gets added on their shoulders,” he says
CalSavers requires employers who do not offer a retirement
plan to facilitate employee enrollment, but does not require business owners to
take care of tasks such as distributions or investment management. It also
doesn’t require employers to match employees’ contributions, which go into a
Roth IRA. Still, CalSavers does require some action on employers’ part.
“There will be work there, so they ask ‘How can I get a plan
that will benefit me?’ In some instances, they are discovering there are great
options,” Pennino says.
For some business owners, that may mean they launch a 401(k)
for their company, particularly if they can’t take advantage of a Roth IRA
themselves because of income limits. Still, others may prefer the
state-mandated IRA program.
“It may be that [advisors] recommend CalSavers in lieu of a
401(k) because the business owner doesn’t want to do a 401(k) or offer a
match,” Pare says. “It’s better to have something like this than nothing at
all.”
Widespread benefit
While advisors’ focus is on small business owners, it may be
workers who ultimately benefit the most from CalSavers and similar programs.
About a quarter of Americans who were still of working age had no retirement
savings in 2019, according to Federal Reserve data.
“It’s a huge ticking time bomb and if we don’t do something
about it, well, I don’t know what the implications are down the road,” Paré
says.
Many Americans (22%) are forced into retirement earlier than
they anticipated. The rate is higher for Americans with a higher school degree
or less (28%) than for those with a bachelor’s degree (13%). About one-third of
those surveyed said their unanticipated retirement was due to health reasons,
according to the Fed’s data.
The Fed also reports that 16% of Americans were unable to
pay all of their current month's bills in full at the time of the survey, and
12% said they would be unable to pay all of their current month's bills if they
had an unexpected $400 expense that they had to pay.
The state IRA programs are still young. Georgetown
University’s McCourt School estimates that Oregon, Illinois and California's
programs have just 278,000 accounts and $172 million in assets as of Jan. 31.
But as these programs scale up, they may help more lower-income Amerians save
for retirement in part because they rely on inertia. Behavioral-finance
research has long shown that people typically stick with default contribution
percentages when they are automatically opted-in.
CalSavers sets contributions at 5% and the savings rate
increases by one percentage point each year until it reaches 8% (unless account
owners choose otherwise). The first $1,000 are invested in a money market fund
and subsequent contributions are put in a target-date retirement fund based on
the employee’s age, though account owners can select a different option.
“The good news about this program is that it’s portable.
That gives the employee a lot of flexibility,” Pennino says, noting an
additional benefit: workers can easily access funds, should they need to,
because the account is a Roth IRA.
Of course, many people most likely to benefit from these
programs — lower-income Americans — also belong to the least-likely target
client demographic for financial advisors. Account minimums and fees may be a
high barrier today for these investors, but that could shift as their new IRAs
grow.
“Most people will take the path of least resistance, so
they’ll leave the money in that fund,” says Mark Prendergast, director of tax
strategies at Inspired Financial in Huntington Beach, California.
State legislatures’ hope is that these new Roth IRAs may
turn small sums into tidy nest eggs for retirement. Account owners may find
themselves with a better retirement outlook and, perhaps, a need for
professional financial advice.
“If we can get this socioeconomic group to save and invest
in their Roth IRAs, it may just change their lives,” Prendergast says.
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