Illinois legislation, the first in the country, recently authorized a new state sponsored retirement savings vehicle called the Secure Choice Savings Program (Secure Choice). The program is aimed at upwards of 2 million Illinois workers who are not currently covered by an employer provided retirement plan. There are at least 16 other states considering legislative proposals providing similar retirement programs.
The Secure Choice program offers a pooled investment fund for employees who are not covered by employer provided qualified retirement plans. With a promise of low fees and competitive investment results, the program is mandatory for businesses and not-for-profit employers with 25 or more employees age 18 and over that have been in existence for at least two years. Smaller employers can participate but that participation is optional.
The highlights of the Secure Choice program include:
- Covered employees will be auto-enrolled to make contributions by payroll deduction at a default contribution rate of three percent of compensation (employees can adjust this rate or opt out of participation at any time).
- Employer contributions are not permitted (this helps keep the program from imposing the federal compliance burdens on employers).
- Limited investment options will be provided including a default “life cycle” fund for employees who do not make their own investment choices.
- Employee contributions will, like Roth IRA contributions, not be deductible for income tax purposes but investment gains are to be sheltered from tax until distribution.
- Participating employees will have access to their funds at any time but tax advantaged distributions can be made only after the employee attains age 59½.
- Program assets are in a single investment pool managed by the state treasurer and others on a seven person board that includes a majority of elected officials, state employees and government appointees.
- Non-compliant employers can be punished with a fine of $250 per employee per year.
The program is to be rolled out in Illinois by 2017 when the complicated program infrastructure needs to be up and running to enroll all eligible employees. The cost to Illinois of the rollout process has not been estimated but it could be substantial. The program is also subject to regulatory review by the federal government for consistency with federal laws.
From an employer’s perspective, the promise of administrative simplicity could prove to be illusory. There will have to be ongoing employee communications, an enrollment process, a deposit arrangement, and account management functions that will have to accommodate employees who do not have access to internet portals that are customarily provided to manage personal retirement funds.
From an employee’s perspective, how reliable is the pledge of low cost, competitive investments? The program is to be managed, at no cost to the state, by a private administrator for a projected fee of .75 percent of account assets. Is this on top of management fees of the mutual funds that will likely be included as investment choices? Will there be additional charges for the custody of plan assets? Will the plan charge participants for specific services such as plan distributions or the processing of domestic relations orders?
And from the tax payers standpoint, is it really free? Won’t there have to be detailed regulations? And even though the management board is not compensated, what about the costs of the infrastructure set up and rollout? The challenges could be comparable to that of the Affordable Care Act rollout which involved substantial expenses just for outside contractors ($135 million was spent for advertising and PR alone).
It is entirely possible that Governor Rauner’s administration will pull the plug on this program or that it will not make it through the federal regulatory hurdles. Other alternatives might make more sense. The federal “myRA” program is now up and running to provide participant contributions by direct deposit to a cost-free Roth-IRA type savings vehicle. Also pending in Congress is the Secure Annuities for Employees (SAFE) Act that proposes a simplified 401(k) plan for smaller employers. In any event, subject employers have until the 2017 deadline to consider alternatives. Many will find that adopting an IRA-based retirement plan makes more sense.
And keep in mind, this is Illinois, an insolvent state with a history of insider deals and corruption involving the management (and mismanagement) of state pension funds – a state with its own funding liability for state sponsored retirement benefits measured in tens of billions of dollars. So, what could possibly go wrong?
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