By Anna Petrini
Departing Illinois Governor Pat Quinn signed a groundbreaking bill on Sunday that supporters say will help pave the way to a secure retirement for millions of private sector workers.
State lawmakers passed the Illinois Secure Choice Savings Program Act more than a month ago, creating the nation’s first state-sponsored, automatic enrollment Roth IRA (Individual Retirement Account) program for private sector employees without access to workplace retirement savings accounts.
State officials estimate that 2.5 million private sector workers in Illinois lack access to an employer-sponsored retirement savings option.
Participation in the new program will be mandatory for established employers that do not offer retirement plans and have 25 or more employees. It will be optional for smaller and newer employers. Enrolled employees will automatically contribute 3 percent of their paychecks, unless they elect a different amount or opt out altogether. No employer match or contribution is required.
Only one-half of private sector workers are participating in any form of employer-sponsored retirement plan, and households approaching retirement have seen a surprising decline in 401(k)/IRA balances, according to a recent analysis of Federal Reserve data.
Champions of Illinois’ new program want to capitalize on employee inertia and economies of scale. They contend that automatic enrollment will make saving easier, and pooling individual accounts will allow for lower fees and diversified, professionally managed investments.
Critics point to the state’s troubled public employee pension plans and question whether Illinois should be managing private sector retirement funds, too. (Bill drafters included language releasing both the state and private employers from any liability for benefit payments.)
In the last two years, more than a dozen states have seen legislation introduced that would authorize similar plans or examine their feasibility. In 2012, California passed its own Secure Choice bill, which requires a market analysis and further legislation before it can be implemented.
Massachusetts will soon allow nonprofit organizations with fewer than 20 employees to participate in a contributory retirement savings plan overseen by the state treasurer’s office.
State governments aren’t the only ones trying to promote retirement savings among private sector workers. Early in 2014, President Obama directed the Treasury Department to set up a new “myRA” (My Retirement Account) program aimed at wage-earners without access to employer-sponsored retirement plans. Unlike Illinois Secure Choice, myRA requires employers and employees to opt in.
Federal law presents complications for state-run plans aimed at nongovernmental employees. Plans for private sector workers are generally governed by ERISA, which establishes strict rules for plan sponsors.
Under Illinois’ new law, the program’s board must request a ruling on whether ERISA applies, and the program cannot be implemented if it fails to secure the favorable income tax treatment usually afforded IRAs or if it is deemed an employee benefit plan with state or employer liability under ERISA. The program would become operational in 2017.
Anna Petrini is a policy associate in NCSL’s Fiscal Affairs program.