Recently Illinois’ Governor Pat Quinn signed into law the Illinois Secure Choice Savings Plan. This plan provides an automatic Roth IRA via payroll-deduction for some employees who do not have an employer-sponsored retirement savings plan.
Essentially this law will require employers with 25 or more employees to establish a payroll deduction program permitting the workers to defer earnings into a Roth IRA, beginning in June 2017. Employees will be automatically enrolled (hence an automatic Roth IRA), but the workers will have the opportunity to opt out of the program. The automatic enrollment includes a 3% salary deferral, but the employee can increase the deferral amount, up to the legal limitations (in 2015 it’s $5,500, $6,500 for folks over age 50). There is no company matching with this program.
Employers can still provide their own 401(k) or other deferred savings option, but if no other option is offered, the Secure Choice Savings Plan must be offered.
The Roth IRAs under this plan will be administered by a single manager, similar to the 529 programs offered by the state. Also much like the 529 programs, the funds are the property of the account owners and not the state. The account will be portable in the event that the worker changes jobs. The worker could also rollover the funds into another Roth IRA outside the plan or to a new employer’s Roth 401(k) plan if allowed.
The plan is to offer, by law, a conservative principal protection fund, a growth fund, a fund with the primary objective of protecting principal while providing a stable and low risk rate of return, a target-date fund, and an annuity fund.
In addition, the law requires that the administrative costs cannot exceed 0.75% of the balance in the trust established for the funds.
Several other states have pursued such programs, but this is the first that has been signed into law with a specific deadline for beginning to offer the accounts.
I’m in favor of any program the helps people to save, but I’m skeptical about this program’s effectiveness, just as I am about the myRA program. This type of plan is really nothing new, although it does take a few of the decisions out of the hands of the saver. Under both kinds of plan, a custodian is provided by default. In addition, in both types of plan there are relatively few choices for investment allocation – which should help to reduce confusion by the saver. Both plans also provide for payroll deduction for funding, at no cost to the saver (although it’s going to cost the employer something to make changes to the payroll system to provide for this deduction).
In the Illinois Secure Choice Savings Plan, signing up is automatic as well, so it’s a sort of forced savings – but the worker has the ability to opt out, taking that improvement out of the mix.
In the end result if this program helps a few folks to save money for retirement I think that’s a good thing. I’m afraid that it’s likely going to be just another program that had great expectations but in reality does little to resolve the problem of low savings rates.
Sterling Raskie, MSFS, CFP®, ChFC®
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While I like the idea of an automatic plan I feel this so called automatic plans falls short in the fact that 3% isn’t going to do much for anyone. If you are going to make it automatic then do something that will actually be useful, don’t give a false sense of hope. Like, starting at 3% and then automatically adjusting 1% per year until they get to 15% of their salary.
Based on the average salary, $65K (which seemed high but we’ll use it anyway) in Illinois from Indeed.com 3% is only $1950 a year. 30 years of this invested with a 5% return which seems awfully high for a conservative growth strategy will only return $130K in the end. Afer 30 years it only generates 2 years worth of total salary return. This is higher than the average US net worth but no one will be able to make a retirement of it.
I didn’t have a calculator advanced enough to complete my suggested model but simply doing the calculation from the time they hit the 15% mark (12 years in) and then saving for 18 more years easily doubles the $130K to $275K. So adding in the previous years as it is adjusting up to this number would provide a substantial nest egg. This would be something that people could actually live on for a period of time in retirement.
I do like that people can opt-out of this plan if they are doing their own thing.
I have never heard a comment that older people wished they had never saved or wished they had spent more or new cars and things when they were younger.
But I have heard comments such as “nobody told me about this plan” or “I wish I had started saving when I was a lot younger.”
If we leave up to the “personal responsibility” idea, which is very compelling and sounds great, but doesn’t seem to work either, we will get the same results we are getting now, millions of folks ill-prepared to retirement. Lets give this a try and its back up by UCLA research. All new ideas have push back.
Years from now, I think most people in Illinois will thank their state government for helping get them started and thank themselves for not opting out!
I don’t like “forced” anything. I think this gives people a false sense of security. I’d much rather see “optional” financial planning classes offered at work. Teach people what they need to do and why they need to do it and let them take personal responsibility for their lives. I hate this “the gov’t or your employer – whomever” will take care of you mentality. And these “forced” savings plans nuture that kind of mindset.
I agree, Jim.
Taking personal choice out of the picture (although you can opt out) just goes against the grain for me. As you mention, long-term benefits could be found from education in the workplace, which I’d like to see pursued.
jb