Legislature Wants Private Sector Pensions, Despite Maryland’s $20 Billion Pension Shortfall
By Mark Uncapher
Undaunted by Maryland’s $20 billion public employee pension shortfall, the legislature has passed a bill putting the state in the pension business for private sector employees. The General Assembly proposed this session creating a “Maryland Small Business Retirement Savings Program and Trust,” imposing yet another state mandate on Maryland businesses. Employers would be presented with the choice of either offering employees their own pension plans or else adding a new voluntary payroll deduction funding a new state retirement program for private employees.
Senate Bill 1007 requires all eligible private-sector employers with at least 10 employees to participate in the program. Participation in the program mandates employers to remit employee contributions deducted from payroll into an IRA. Employees of a participating employer are automatically enrolled to contribute 3% of their compensation, but they may opt out. Employers are not required to (and in fact may not) contribute additional amounts.
The bill’s fiscal note projects a four year cost to the state of $154 million because the plan is structured with adjustment in business fees for participating companies. According to news accounts, Governor Hogan has not yet decided whether he plans to sign the bill, but noted that “all bills that passed are currently under review by the governor and administration.” The Maryland Chamber of Commerce opposes the bill.
The program would be administered by a “Maryland Small Business Retirement Savings Board” comprised of the state treasurer, state secretary of labor, licensing and regulation, three members each appointed by the governor; the president of the Senate and the speaker of the House of Delegates. Note that legislative leaders have awarded themselves a majority of the eleven board member slots for their own appointments.
Maryland is the most recent state to pass such a bill focused on private-sector employees, following programs adopted by California, Oregon, Washington and Illinois. However, not one of these state programs is yet in operation because they are all illegal under Federal law. They can go forward only if they receive waivers from the U.S. Department of Labor from Federal law prohibiting these schemes under the Employee Retirement Income Security Act.
Beyond the bill’s cost and murky legality, another curious feature of the bill is that the state is permitted to charge accounts of up to $5 per $1,000 of assets. To put these charges in perspective, the most recent annual average net expense for the “Thrift Savings Program” offered federal employees was $0.29 per $1,000 invested. In effect, the proposed law allows this new state agency to dip into individual retirement accounts to collect 17 times the administrative fees as the Federal program does. Given current low interest rates, state administrative costs charges have the potential of eating up most of any investment returns. These cost limits only cover the administrative fees. There are no caps on separate investment management charges.
Excessive fees are a recurring feature of the state’s pensions. Jeff Hooke, in a study for the Maryland Public Policy Institute, has tracked the state’s Wall Street advisory fees. In one recent year, they totaled $274 million, which as a percentage of assets ranked as one of the highest in the country. Despite paying more as a percentage of assets than nearly every state, Maryland’s investment performance has lagged other jurisdictions. In part because of this sub-par investment performance, the state has a pension funding shortfall of one third of the total obligation, which translates into a hidden debt obligation of $14,000 for every household in the state.
The Maryland Small Business Retirement Savings Program does provide that the state may not be held liable for the payment of retirement savings benefits payable by the program or trust. So unlike state public employee pension plans which guarantee a specific set of benefits, the new program only entitles participants to the assets in their own accounts.
Unquestionably, many Americans are not saving enough, especially for their retirement. A number of Federal proposals could improve this situation. For example, the required delays in sign-up opportunities for new employees undermine participation. However, the new Federal regulations concerning the advice employees receive about their pension options seem likely to do more harm than good.
Yet, in setting up a program projected to cost the state nearly $40 million per year, private sector employees deserve a better deal that is more carefully constructed than this new scheme.