We Trust States to Promote College Savings. Why Not Retirement Savings?

One of the most popular ways to save for higher education is through a savings or prepaid tuition plan known as a Section 529 qualified tuition program, or 529 plan. Currently 49 states and the District of Columbia offer 529 plans. Thirty-three states give a state tax break to parents, grandparents or friends who contribute to a 529 account.

Through these plans, the funds are managed by private-sector investors. This professional management, combined with a simple enrollment process, has spurred the growth of the 529 industry from less than $2.5 billion in college savings in the 1990s to more than $253 billion today.

Following the success of college savings plans, states are now taking the lead to expand retirement savings options. Some 30 states are considering creating retirement savings plans for small-business employees whose employers do not offer one. Five states have newly enacted laws to require employee contributions to the state plan to be run by a private investment manager, just like 529 plans. Yet given the success and bipartisan support of state college savings plans, it is puzzling that some in Congress are skeptical about the prospect of similar state efforts in the retirement savings arena.

As was the case with the 529 model, states or the independent entities they establish to run the retirement program have a fiduciary duty to protect plan participants. While each state has the flexibility to customize its 529 plan, the plans all adhere to a strong standard of consumer protections. These existing standards and procedures are a sound precedent for state-facilitated retirement savings programs.

While state-facilitated retirement saving plans are still in their infancy, the solid track record of state-facilitated college savings plans should reassure savers and policymakers alike that consumers’ investments will be managed responsibly. For more about how 529 plans serve as a model for state-facilitated retirement programs, see this policy brief from the Georgetown Center for Retirement Initiatives.

 

Catherine Harvey is a policy research senior analyst at the AARP Public Policy Institute, where she works on savings policy, with a focus on improving retirement security for millions of Americans whose employers do not offer a retirement plan.