California is about to implement one.
Illinois is partway through implementing one.
All these states have state-run programs of IRA accounts in which the state mandates that all employers who don’t otherwise offer retirement benefits, enroll their employees, with an option for those employees to opt out, or to select an alternate contribution percentage. Details vary by plan, but in the Illinois version, the default contribution is 5%, which is defaulted into a target date fund as a Roth IRA. The fund charges approximately 0.75% of assets as an administrative fee, and administration is contracted out to a private-sector administrator, in this case, Ascensus.
These programs are all new enough that their long-term, or even medium-term effectiveness is unknown — and, no, it is not simply a given that a program such as this will be effective. If participation is low enough that administrative costs are inappropriately high, or if state governments succumb to the temptation to profit from the program or interfere with professional asset management, we’d be better off without these programs.
And here in Illinois — well, as I write this, it’s the last day of the regular legislative session, and the legislature is rushing through, among others, bills containing the state budget, marijuana legalization, gambling expansion, and a massive infrastructure plan, all of which are expected to be coming up for votes without any degree of transparency or debate. And among the rushed legislation is a bill establishing a college savings account program for all children born in-state in or after 2021 — a program expected to cost $8 million for the $50 per-child contribution, and another $1.5 million in administrative costs — that’s nearly 20%!
Here’s some other news out of Illinois:
On May 26, The Center Square reported on a bill that passed the state House and is awaiting a vote by the Senate:
The Illinois Student Loan Investment Act would allow the Illinois Treasurer’s office to refinance an Illinois resident’s college loans at low-interest rates in hopes that it would help them better afford their payments. If enacted, the office could loan up to 5 percent of the roughly $31 billion it manages, currently worth about $620 million. There would be an upfront cost of $150,000 for the state, but the interest on payments from students should then cover the administrative costs thereafter.
To be sure, this investment program isn’t envisioned to be using public pension assets or other funds held in trust, but these are nonetheless funds which the Treasurer’s office is expected to manage with the most appropriate balance of risk and return for the nature of the funds. And yes, this program is being promoted by the Treasurer, Michael Frerichs, and you can bet he’ll be highlighting “helped Illinois graduates refinance their loans at low interest rates” in his next re-election campaign.
Separately, some two months ago, reports surfaced about an impending $500 million bailout of the state’s prepaid college tuition program, “College Illinois.” While the state never explicitly guaranteed that it would cover tuition even if program funds fell short, these bills intend to do just that, to make whole parents who believed, based on plan marketing, that they were buying into exactly such a promise. And what’s more, this program’s failure to anticipate hikes in tuition and other forecasting was compounded by “an ill-considered move into aggressive “alternative” investments like private equity, real estate and hedge funds” once actuarial forecasts showed the funds were in trouble.
And, looking beyond Illinois, last week a report appeared in the Washington Post about 529 college savings plans’ fees. Because each state has a monopoly on tax-advantaged college savings funds, author Quinn Curtis reports,
States have significant conflicts of interest in this area, too. In some cases, private companies run the plans (meaning they collect checks and handle administration for an array of pre-existing mutual funds, from which investors choose). But the states still charge these companies for the privilege of working under their umbrella. States then steer some of the management fees they collect into other educational programs — notably scholarships and prepaid tuition plans. Such revenue-sharing reduces the incentive to keep costs down, and it means the states aren’t acting in the fiduciary interests of savers.
So, yes, I am a disgruntled Illinoisan. Readers from other states may hope, or even believe, that their state government is honest and above-board and that their public officials will never succumb to any such temptation, and that’s great. But how confident are you?