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 But Illinois just became the first U.S. state to adopt a promising
new approach to a big problem in the nation's retirement saving
system: the lack of workplace saving options for low-income workers.
Starting in 2017, companies that do not offer retirement plans will
be required to automatically sign up their workers for a
state-sponsored Roth IRA account, funded by a 3 percent (or higher)
after-tax deduction from their paychecks, with the growth accruing
tax-free.
The requirement applies to employers with 25 or more workers who
have been in business at least two years, and workers can opt out if
they choose.
Given the state's pension woes, the new Illinois Secure Choice
Savings Program (ISCSP) may seem like hubris. But the state will not
be contributing to ISCSP accounts, and investment management will be
farmed to an outside firm.
The default investment will be a target-date fund, which reduces the
allocation of higher-risk equities as the account holder gets closer
to retirement, alongside four other simple fund choices.
The aim is to keep fees low - not exceeding 75 basis points annually
- and far lower than that if the plan's sponsors have their way.
The new law puts Illinois at the vanguard of a growing movement to
address the yawning gap in retirement savings for low-income
workers. Initiatives are proliferating at the state and federal
level, and the reasons are clear.
Ownership of retirement plan accounts has been falling sharply -
just 40 percent of households owned any type of account - IRA,
401(k) or traditional pension - in 2013, down from 48 percent in
2007, according to the Federal Reserve Board's triennial Survey of
Consumer Finances released last September.
The Center for Retirement Research at Boston College estimates that
at any given point, only half of U.S. private sector workers
participate in a retirement plan.
In Illinois, 72 percent of private-sector workers in high-turnover,
low-wage industries lacked access to a retirement plan, according to
a study by the Woodstock Institute. By comparison, 70 percent or
more of high-income workers are covered, industry data suggests. The
study - based on industry and federal government data - found that
ISCSP could potentially serve 2.5 million workers.
Plans like the ISCSP have been proposed in one form or another in
more than half of the states.
"We've hit a critical mass on this concept," says Sarah Mysiewicz
Gill, senior legislative representative at AARP, which has been
working with proponents at the state level to advance the idea.
U.S. President Barack Obama has proposed creation of auto-IRAs at
the federal level, and this year the administration is kicking off
the myRA, a voluntary program aiming to help workers at companies
that do not have retirement plans to set aside small amounts from
their paychecks in a savings bond-like product.
OPPOSITION
These savings plans are all modest attempts to address the
retirement crisis. Even so, there is plenty of opposition.
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The Financial Services Institute (FSI), an industry lobbying group,
recently announced that fighting Secure Choice plans will be among
its top state legislative priorities this year. FSI, which
represents independent broker-dealers and financial advisers,
worries that Secure Choice plans will limit the opportunity of its
members to work with small employers to create their own workplace
plans.
"Some of these bills expressly state that financial advisers can't
be involved in the process whatever," says Robert Lewis, FSI's vice
president of legislative affairs.
FSI says it did not oppose the Illinois plan because it did not
contain such a provision, but there were plenty of other opponents.
"It was very difficult to pass," says Daniel Biss, the state senator
who sponsored and championed the bill. "When you talk about it to
the public, no one can understand why you wouldn't try it. But the
opponents fought hard to defeat it."
Key opposition came from state business associations and the
American Council of Life Insurers (ACLI) in particular, which has
been fighting Secure Choice plans around the country.
"We haven't been at the table helping to craft these plans," says
John Mangan, ACLI's vice president of state relations. "Our industry
has been in the retirement business for 100 years and we think we're
doing a great job with employers who adopt their own plans."
But when considering the unimpressive levels of retirement coverage
in the small-business sector, arguments such as that one are wearing
thin. Mangan concedes that the retirement savings gap is most acute
in the very market Secure Choice plans aims to serve.
Mangan says there are better ways to close the gap, such as new
low-cost, multiemployer 401(k) options for small businesses at the
federal level, and at the state level, expanded savers credit and
creation of certified networks of insurance providers who can
provide low-cost payroll deduction options for employers.
These two approaches will be competing state-by-state over the next
couple years, and we'll have a chance to see which produces results.
May the best ideas win - along with the workers who need better
options for building retirement nest eggs.
(The opinions expressed here are those of the author, a columnist
for Reuters.)
(Editing by Lauren Young and G Crosse)
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