Illinois will become the first state with a broad-based effort to automatically enroll private-sector employees without retirement plans into a new savings program.
Gov. Pat Quinn signed legislation on Sunday that creates the Illinois Secure Choice Savings Program. Employers with at least 25 workers and no retirement plan will be required to offer employees the option of enrolling in Secure Choice, which allows employees to invest in a Roth IRA through payroll deduction. Employees can decline.
“This turnkey program will make it easier for people to take charge of their future, improve their likelihood of living independently as they age while providing a strong competitive edge for small businesses in the state,” says Gerri Madrid-Davis, director of financial security and consumer affairs for AARP, which has advocated for such state-sponsored programs.
Roughly half of workers nationwide don’t have a workplace retirement plan. The result is that many of them could end up relying solely on Social Security later in life for income. Illinois Secure Choice is just one of the latest efforts to help these employees build a nest egg.
California, for example, passed similar legislation and is conducting a feasibility study before it starts a program. Massachusetts plans to offer a state-administered savings program for employees of small nonprofits. Several other states, too, are considering programs.
Meanwhile, the federal government last month launched its own version: myRA, which stands for "my Retirement Account." Proposed by President Barack Obama in his State of the Union message last year, this Roth IRA has no fees and is guaranteed against losses. Even employees with a retirement plan at work can direct a portion of their paycheck into myRA, where the money is invested in government savings bonds. Investors must transfer their money out of the account once the balance reaches $15,000, although they can do so earlier if they prefer different investments.
The Illinois Secure Choice program is expected to be running by mid-2017.
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“It will become a model for the rest of the country,” says Karen Friedman, executive vice president and policy director with the Pension Rights Center in Washington, D.C.
In Illinois alone, about 2.5 million workers are without an employer-sponsored retirement plan. The law is expected to cover as many as 80 percent of them, says state Sen. Daniel Biss, a Democratic sponsor of the legislation.
Of course, nothing is stopping workers from saving on their own in an IRA when an employer doesn’t offer a retirement plan. However, that’s not how many people are wired. Unless money is automatically taken out of each paycheck and invested in a retirement plan, many employees just don’t do it. In fact, employers that automatically enroll workers in a 401(k) savings plan see a much higher level of participation than those that leave it to employees to sign up.
“We know having an employer plan is the best way to save,” says Biss, a former math professor.
In the Illinois program, employers must offer a way for their workers to save if they have been operating for at least two years, have 25 or more employees and no retirement plan. Even smaller employers can join Secure Choice if they want.
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Here’s how it will work:
Unless workers opt out entirely, an employer will automatically enroll them, deducting 3 percent of their wages for deposit into a Secure Choice Roth IRA. Workers can elect to put more than 3 percent — or less — into the account, although they can’t exceed current annual limits for Roth IRAs. Right now, the maximum annual contribution to a Roth is $5,500 for those under age 50 and $6,500 for those older. Employers don’t contribute to the account.
Workers will be offered a variety of investment options. If they don’t choose one, their money will likely be invested in a target-date fund that becomes more conservative as they age. The accounts do come with fees, although the total annual amount can’t exceed 0.75 percent of invested assets. Any earnings on the money can be withdrawn tax-free in retirement.
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