Last week, the Illinois General Assembly joined the State Senate by passing the Secure Choice Retirement plan (SB 2758). If signed by out-going Governor Quinn, Illinois will be the second state in the nation to adopt and perhaps the first to offer a state-run retirement plan for the private sector, with a June 1, 2017 kick-off date. California passed legislation in 2012 authorizing a similar idea in concept, but is awaiting the completion of a market analysis and long-term sustainability report that has yet to be conducted.
The Illinois plan will require participation from companies not currently offering a retirement plan, in operation for at least two years and with 25 or more employees. Employees will be automatically enrolled in the program with a contribution rate set at 3% of their wages, with the option of opting out if they don’t want to participate.
The program is set up as a way for employees to set aside a part of their own earnings for their retirement. Making it easier for individuals to save for their retirement is a great and very important first step to enhancing retirement security. More details on the plan and the politics involved, including some thoughts from the bill’s sponsor, Senator Daniel Biss, can be found in an article in Crain’s Chicago Business Journal.
This type of retirement plan eliminates many of the concerns legislators have with the Employee Retirement Income Security Act (ERISA).The types of retirement plans that allow employer contributions operate under a larger set of ERISA regulations. These rules are more complex and cumbersome for companies offering 401k plans, for example, and greatly streamlined for retirement plans for small businesses with under 100 employees. Under small business plans the rules are simple and based on commonly accepted investment industry practices. Even so, legislatures balk at even the possibility of liability associated with mismanagement of such a program.
In Washington State, the House of Representatives passed the Save Toward A Retirement Today (START) bill (HB 2474) prime sponsored by Representative Springer (and the Senate version, by Senator Mullet). This bill only applies to businesses with under 100 employees, where the greatest percentage of workers lack retirement plans.
Participation in START is voluntary for employers. A key provision is that it provides for two pathways, one of which allows for businesses to contribute to their employees’ retirement accounts. In a common scenario, employer contributions would match the 3% employee contribution for a 6% total contribution. Such savings would go much farther towards establishing sufficient resources for retirement. The second pathway is for businesses to simply allow employees the opportunity to put their own funds into an IRA. This option is very similar to both the California and Illinois legislation, only it’s on a voluntary basis. More information on START, including fact sheets is here.
States are at the forefront of looking for ways to help workers fill the retirement saving hole. There is still much work to do at the federal and state levels. For a truly secure future, workers in Illinois and around the country will need more. Strengthening and improving Social Security is a critical step. Developing better and more company sponsored retirement plans, such as traditional pensions or better designed defined contribution plans are another.
The Illinois legislature and the many organizations that have voiced their support for this idea, including AARP, the Woodstock Institute, the Shriver Center, the Heartland Alliance, and the Small Business Majority, deserve kudos. Establishing a retirement nest egg is one of the key strategies for having sufficient retirement resources. Secure Choice will make putting aside personal savings for retirement a whole lot easier for workers in Illinois.
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