The U.S. is facing a growing debt crisis, the baby boomer generation is entering retirement, people are living longer today than ever before, and long-term health care costs are rising to unmanageable levels for many older Americans. Given the retirement demands facing the nation and its retirees, saving more for retirement has never been more important, yet not enough Americans save enough for a retirement free of financial hardship and worry.
A major cause of this lack of long-term savings, according to a recent Woodstock Institute Report, is a lack of opportunity: 50% of workers in Illinois lack access to employer-sponsored retirement savings plans. To increase access to retirement plans, several states have stepped in to provide workers with an option to save for retirement through state-sponsored private employer retirement savings plans in the absence of an employer-offered plan. California recently became the first state to pass a law creating an automatic enrollment individual retirement account (IRA) program, and Illinois is currently considering similar automatic IRA legislation.
The California Source Choice Retirement Savings Trust Act would create a statewide retirement savings plan for private sector workers who do not have access to an employer-sponsored retirement savings plan. Under the law:
- All California employers with more than five employees not offering a retirement savings option would be required to offer the new state IRA program.
- Eligible employers not electing to offer their own savings option would be required to automatically enroll all employees into a 3% payroll deduction auto IRA plan, called the California Secure Choice Retirement Savings plan.
- Employees could opt-out of the program and/or change their deduction amount.
- All investments would be placed in a pooled trust fund administered by an appointed nine-member board that contracts with third-party firms to manage, invest, and administer the funds. The trust fund would provide a modest guaranteed rate of return through the use of private insurers who would insure the return rate and bear any liability for losses.
Unfortunately, before the law can be implemented several conditions must be met. First, a preliminary market analysis must be paid for by an entity other than the state. Second, the proposed plan must be approved by the Internal Revenue Service and be deemed, by the U.S. Labor Department, not to be an employer-sponsored plan subject to the Employee Retirement Income Security Act (ERISA). Finally, the California legislature would need to enact legislation approving the final plan.
The Illinois General Assembly is currently considering a similar bill, S.B. 3278/H.B. 4497. Although the Illinois bill is still in its early stage and therefore lacks the detail of the California law, it too would create a statewide automatic IRA program for workers in Illinois. All employers not currently offering a retirement plan that employ between 10 and 100 employees would be required to automatically enroll their employees into a 2% payroll deduction IRA type account administered by the State Treasurer’s office. Similar to the California program, employees would be able to opt-out or change their contribution amount. Similar to the California board, the state treasurer would contract with third-party investment firms to invest and administrate the fund. Unlike the California plan, employees could choose from a limited range of investment options or be put into a default investment. Most importantly, unlike California, the Illinois plan does not establish a guaranteed rate of return.
Both pieces of legislation address a growing problem of retirement insecurity by developing a concept that promotes both progressive and conservative values. They address equal access, while simultaneously promoting personal responsibility and individualism. Although there is concern that states should not enact such programs given their current budget crises, states should remember that there are benefits beyond those enjoyed by enrollees. These types of investment strategies ultimately pay dividends to the states in reduced reliance on government aid and greater wealth owned by their citizens.
The Illinois Asset Building Group (IABG)’s efforts to pass automatic IRA legislation in Illinois will increase access to a vital tool people need to build financially secure retirements. Learn more about IABG’s work and the importance of automatic IRAs at IAGB’s upcoming conference in Champaign, Illinois, on November 15th & 16th. The conference will highlight automatic IRAs in a workshop featuring Karen Harris, Director of Asset Opportunity at the Shriver Center; Spencer Cowen, Vice President of Applied Research at the Woodstock Institute; and David John, Senior Research Fellow in Retirement Security and Financial Institutions at The Heritage Foundation.