Could An Automatic Enrollment IRA Program Be Coming to Your State?
On January 4, 2015, Illinois Governor Pat Quinn signed a new bill into law that could make automatic IRA enrollments for many state residents a reality as soon as July 2017. The Illinois Secure Choice Savings Program is a state-level initiative that is designed to improve residents’ long-term financial security and ability to save for retirement. It comes on the heels of mentions of a similar federal initiative, myRA, and related discussions in a handful of states around the nation.
The move is in response to a changing economic environment and increasing challenges for Americans associated with saving for retirement. Many baby boomers have reached retirement age without adequate savings. In addition, it is not clear how Social Security will look or function decades from now. Finally, as individuals become increasingly responsible for their own retirements as government and private employer pensions fade away, many people without access to traditional 401(k) programs through employers will need a financial vehicle to invest retirement savings in.
The Illinois Automatic IRA program is designed to provide support to 2.5 million private employees that do not have access to a 401(k) program currently. Employers with more than 25 employees, in business more than two years and do not offer a retirement plan, would be required to offer the program to their staff, or to face a fine of $250 per year per employee. Employers are not mandated to make contributions, so the only costs that they would absorb would be the initial set up and arranging for employee direct deposits. Employees would save 3 percent of their salary each year toward their Roth IRA plan. In some cases, employees could opt to save more. Individuals who do not wish to participate will have the option to opt out manually during an open enrollment period.
There are some potential challenges to the program becoming operational. The bill that was signed into law states the program must be implemented within 24 months, and currently available funds to launch the program are limited. Some concerns have also been raised about confusion with a federal program launching in 2015, myRA, which is aimed at solving the same problem. myRA doesn’t have automatic enrollment and offers members limited investment choices.
The Secure Choice Savings Program would leverage guided investments, which enable members to invest in funds based on their target retirement or withdrawal date. The fund’s level of risk is then determined based on that date and the balance of stocks, bonds, and other assets is regularly adjusted to decrease risk as the date draws nearer.
Illinois businesses should continue to watch legislation and implementation around this program. For small businesses in other states, it’s important to be aware of developments around myRA as well as the potential for similar legislative action in other states in the year ahead. From a compliance standpoint, it is also important to monitor related activities to ensure you’re not potentially subject to fines due to non-participation if the regulations apply to your business.