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The future of US retirement provision may not be found in Wall Street, but 3,800km away in Oregon, a state better known for timber, Nike trainers and microbreweries.
OregonSaves, a pilot programme that began enrolling participants this summer, is the first of many initiatives being developed by US states that are designed to provide workers in the private sector with access to retirement plans.
The state-sponsored retirement plan market could grow from scratch to $600bn over 15 years, according to Ascensus College Savings, one company that has taken an interest in it.
“The need is real,” says Scott Morrison, chief product officer at Ascensus, which has been hired to manage Oregon’s programme as well as a similar scheme for Illinois. He says more than 40 per cent of US workers do not have access to a workplace retirement plan.
OregonSaves is an individual retirement account (IRA) programme, in which savers’ contributions are automatically deducted from their pay. “If you give access to these plans to employees, they will participate,” Mr Morrison says. “Payroll deduction is the easiest way for people to save. It’s money that you never see and think you never have.”
Eventually, most of the state’s workers at small businesses that do not offer retirement plans will be automatically enrolled in OregonSaves, though they will be able to opt out.
The Illinois initiative, which is similar in design to Oregon’s, is set to be piloted next year.
Potential size of the state-sponsored retirement plan market
Other states are taking different approaches. Washington and New Jersey are building retirement plan “marketplaces”, in which the states will give employers access to retirement plans provided by private companies. Unlike Oregon and Illinois, Washington and New Jersey will not sponsor the plans, though they will set criteria such as cost limits and types of investments included in the marketplace.
Vermont, meanwhile, is preparing a multiple employer plan, in which workers from more than one company can enrol. Under the system, companies with fewer than 50 employees will be able to participate voluntarily.
The state of Washington’s plan to open its programme in early 2017 has suffered several delays. In July the US Treasury announced it would shut a public IRA savings plan that would have been one of the first investment options offered on Washington’s marketplace.
For plans to be included in the state’s marketplace, their fees must be 100 basis points or fewer and offer certain investment options.
“What we’ve built is a platform that can host the full array of plan types, if ever we get to wild success,” says Carolyn McKinnon, who is coordinating Washington’s marketplace. “We are essentially operating a research and referral service.”
Washington is planning to have the marketplace running by autumn.
For the financial services industry, the state-plan market could eventually be lucrative.
However, because the workers who will participate in the programmes will generally start with a balance of zero, it will probably take years for managers to reach the economies of scale that make such ventures profitable.
Mr Morrison says Ascensus sees potential given the growth of the college savings-plan market, which launched in the late 1990s and has reached about $250bn in assets. Ascensus is the largest programme manager in the market, with nearly $70bn under administration in about 3m accounts, as of July, according to Strategic Insight.
“We think that this state-sponsored [retirement] marketplace [could be] at least twice that size,” Mr Morrison says.
There are more than 30 states that are considering such programmes and most will probably implement them, says Michael DiCenso, a consultant at Inspira, an IRA provider.
“A lot of small businesses are not offering any sort of a retirement plan to their employees,” Mr DiCenso says, adding this is often due to the “expense, fiduciary liability and the time allocation that it takes to run a plan”.
Given the potential for business, the financial services industry should consider participating in these programmes or introducing their own low-cost savings offerings that can compete with the state plans, he says.
“There is an opportunity here,” he adds. “With the state programmes you get less [investment] flexibility, and the private programmes you get much more flexibility in terms of what you want to offer.”