When it comes to making it easy to save for retirement, nothing seems to do the job better than a 401(k). These plans are set up through employers, and workers may never miss the money since it’s automatically pulled from their paychecks.

It’s a system that operates well for many, but what about the approximately 20 percent of workers whom the Bureau of Labor Statistics says don’t have access to an employer-sponsored retirement plan? Traditionally, those folks have had to be proactive about setting up an IRA or other retirement account.

However, industry insiders say it’s an uphill battle to convince some people to open their own personal retirement account. “It’s intimidating,” says Steven Elwell, a certified financial planner and vice president at Schroeder, Braxton & Vogt in Amherst, New York.

The federal government tried to help with the launch of its myRA program last year, which allows workers to set up direct deposits into a government-run Roth IRA. But those plans still require workers to take the initiative and set up accounts. Plus, the money is invested in government securities which typically have a poor return relative to other investments.

Now, states think they have a better idea.

State-Run IRAs Target Small Businesses

According to the Pension Rights Center, half the states in the nation are discussing the possibility of creating state-run IRAs for workers at small businesses. California was first to explore the option when it passed the California Secure Choice Retirement Savings Program in 2012. Since then, Oregon and Illinois have passed legislation to create their own plans. Another 22 states have introduced legislation or convened task forces on the matter.

While the details will likely vary by state, the premise is the same. Small businesses — which could conceivably be defined as a workplace with anywhere from five to 100 employees — set up automatic withdrawals from paychecks to be sent to an IRA managed by the state. Workers could opt out, but those who don’t will automatically be enrolled in a plan with investments based on their expected retirement date.

David Ramirez, co-founder and chief investment officer for 401(k) provider ForUsAll, says most small businesses opt out of providing employee retirement accounts — not because they don’t want to offer them, but because the plans are too complex to set up. “Our industry hasn’t made it cheap or easy,” he says.

The state-run plans are expected to remove most of the complexity and cost associated with managing retirement accounts and make them more attractive for small business owners.

Challenging the 401(k) Industry

While state-run IRAs may be good news for small businesses and their employees, not everyone is thrilled with the idea.

“Wall Street is very unhappy about these plans,” says Ric Edelman, chairman and CEO of Edelman Financial Services in Fairfax, Virginia. “They see them as a direct threat.”

Others in the industry are viewing them as a challenge. That’s the approach taken by Ramirez, whose business focuses on serving small employers. He says 401(k) plans offer benefits an IRA can’t beat, such as more investor protections, a higher cap on contributions and a potential employer match. While state-run IRAs fill a hole for some workers, Ramirez sees them as a catalyst for 401(k) providers to ramp up their offerings.

“The industry has largely failed to make the best-in-class option — the 401(k) — more accessible,” he says. “…We can do better than state-run IRAs, and they’ll force us to re-evaluate how we do business.”

The Future May Hinge on the Department of Labor

Whether Ramirez and other 401(k) providers will get a chance to prove their option is better than a state-run IRA hinges largely on a Department of Labor ruling. At question is whether the IRAs would be governed by the Employee Retirement Income Security Act of 1974, known informally as ERISA.

“If they do [fall under ERISA], these plans will have an added level of complexity,” Edelman says. “If they don’t, consumers lose a certain level of protection.”

The 1974 law requires the plans to work under certain fiduciary guidelines and also would make employers liable if a plan is not managed properly. As a result, requiring plans to meet ERISA regulations could be enough to put an end to the prospect of state-run IRAs. In fact, the California law authorizing the state’s retirement savings program prohibits it from going into effect unless it is exempt from ERISA.

“If I were an employer and told I was going to be liable for that plan, how could I not be concerned?” Elwell asks. The liability issue could mean small businesses say no thanks to the idea.

In November, the Department of Labor issued a proposed rule to exempt state-run IRAs from ERISA requirements. If finalized, the rule will pave the way for states to finally implement or move forward with their plans. For many, the department rule will be welcomed.

“We’re hugely supportive of it,” Ramirez says. “It’s needed.”

If the rule is approved, millions of workers nationwide could get access to the convenience of a workplace retirement plan that requires no effort on their part and very little on the part of their employer.

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State-Run IRAs May Offer a New Retirement Plan Option originally appeared on usnews.com