New state retirement plans are welcome, but why so expensive?

Next month, Oregon will become the first U.S. state to start automatically signing up workers to save for retirement if they do not already have a workplace 401(k).

Eight other states are getting ready to launch state-sponsored auto-IRA programs, and it is an idea whose time has come. Fewer employees have access to workplace retirement plans and 47 percent of U.S. households say their total household savings and investments are less than $25,000, according to the Employee Benefit Research Institute.

States started taking up the cause five years ago when it became clear that a Republican Congress would not approve the Obama administration’s proposal to set up a national auto-IRA program to address the coverage shortfall.

But now that the first state plans are under construction, an unfortunate reality is coming into view: These retirement accounts are not going to be cheap for account holders, at least not in the early going.

In Oregon, savers initially will pay a fee equivalent to 1 percent of the total amount invested in their accounts, or 100 basis points. That is much lower than the fees charged by many small-business 401(k) plans, which often exceed 200 basis points. But it is much higher than what a saver would pay in a large plan – which is exactly what the state auto-IRA plans aim to become.

The largest expense is creating the network for automatic payroll deductions by employers. In Oregon, for example, 85 basis points of the fee will go to the third-party administrator selected to build and operate the plan, Ascensus. Just 5 basis points will go to the state to cover its overhead; the mutual funds will cost from 6 to 13 basis points, according to a representative of Oregon State Treasury.

Other states hope to launch with somewhat lower costs as learning advances on what goes into creating a new structure like this. Learn more at Reuters Money.

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