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.