Insurance Industry Doesn't Understand Retirement Access
In Sunday's Gazette-Mail, John E. Pauley, the executive director of the West Virginia Chapter of the National Association of Insurance and Financial Advisors, wrote an op-ed making several dubious claims about the state of retirement security in West Virginia and about the proposed Voluntary Employee Retirement Accounts (VERA) program that is being supported by AARP.
For example, Pauley says:
The AARP claims that 250,000 West Virginia workers lack access to an employer-based retirement savings option. This is simply not true. The real question is whether workers who currently choose not to explore private market retirement options would suddenly consider retirement advice from a state-managed plan?
To use Pauley's own words, this is simply not true. According to the Current Population Survey from 2011-2013, approximately 287,645 private-sector workers in West Virginia work for an employer that does not provide any type of retirement plan. This is about 47 percent of the state's private-sector workforce. Pauley offers no evidence to the contrary. Instead, he just changes the subject by asking whether these workers would enroll in a private market retirement plan if they were offered one from the state. While this a good question, it has virtually nothing to do with how many workers lack access to retirement plans at work.
The good news is that research shows that when workers do have access to retirement plans at work they usually take advantage of them. According to a recent study by the Boston College Center for the Study of Retirement Security, 86 percent of older low-income workers and 95 percent of higher-income workers participate in retirement savings plans when they are offered one at work.
Pauley also says that the $3 million in start-up costs for VERA would be better used for financial educational campaigns and tax incentives. The problem here is that the $3 million in start-up costs is a loan from the state's unclaimed property fund that will be paid back by account fees over time. Therefore, this is not $3 million that is available for program services or tax incentives unless Pauley wants to add a new line-item in the budget.
Pauley also errs when he tells readers that the state will incur a financial liability in implementing VERA similar to state public pensions. Unlike the defined benefit plans Pauley mentions, VERA would be a defined contribution plan similar to the state's 457 Retirement Plus and SMART 529 College Savings plan that is administered by a private-sector financial company. Therefore, it would not be a liability on the state's books. Pauley also asserts that VERA "presents significant risks, costs and liabilities... for West Virginia's small employers." This claim is also unsupported by the evidence. There would be no more risks for small employees than if they started a SIMPLE IRA or 401k with a private company.
While Pauley is correct in saying that "there also is no guarantee" that VERA "would earn tax-preferred status from the IRS" so far there is little to no evidence to suggest that the IRS wold not allow VERA IRA plans to be tax-deferred accounts. If enacted, the State Treasurer's Office will have to submit the plan to the IRS in order for it to be tax-deferred plan.
While there is some uncertainty in how the proposed VERA program would roll out and work, it is pretty safe to say that if West Virginia does nothing it will continue to have almost half of its workforce without a retirement plan at work. This means that the state will have to spend much more money down the road on senior services and other programs as the population ages.