If you want to see a template for the retirement plan of the future, check out the Secure Choice Savings Program enacted by the Illinois legislature in December.
Starting in 2017, all Illinois businesses with 25 or more employees must either: 1) offer a company-sponsored retirement savings plan; or 2) automatically enroll all workers age 18+ in a Roth IRA account within the state-sponsored plan.
The default automatic enrollment percentage will be 3% of salary, and the default investment choice is a target-date fund. Employees can opt-out of participation or actively choose other investment options. Neither the state of Illinois nor individual employers are required to fund costs of the program. (Administrative expenses will be passed through to participants.)
Employers have no role in choosing plan investments. Their only duties are to make payroll deduction available and distribute enrollment/education packets. By law, employers are not considered plan fiduciaries.
The plan’s statutory goals include:
- Maximizing participation, savings and sound investment practices.
- Maximizing simplicity, including ease of administration.
- Providing for the deaccumulation of enrollee assets in a manner that maximizes financial security in retirement.
Maybe you should etch the term “deaccumulation” into memory. It’s really means “annuitization.”
By law, the program must establish investment options that offer participants “the conversion of individual retirement savings account balances to secure retirement income.” Accounts are designed to be portable, and initially it appears participants will have the same transfer/withdrawal choices as other Roth IRA owners. However, that could change over time to require partial annuitization.
The Illinois legislation was passed in response to the “retirement savings crisis.”
It is both apt and ironic that Illinois has the most troubled state pension in the U.S., with a funded ratio of about 44% for its biggest plan, the Teachers’ Retirement System. According to Money, at least 16 other states are considering similar legislation, and Illinois is being viewed as a first-mover and national model.
The penalty for Illinois employers who do not comply with the law is $250 per employee per quarter. If a company wants to avoid state participation and compliance liabilities, it can do so by setting up a SEP, SIMPLE or automatic payroll deduction IRA through a private provider.