State Sponsored Retirement Plans Continue to Expand
Several states are taking the lead from California, Oregon and Illinois by offering state-sponsored retirement plans that encourage or require private sector employers to participate.
The plans are referred to as auto-IRAs because eligible workers are automatically enrolled, generally within 30 days of employment. The default contribution rate is typically 3-5% of a paycheck and the employee can stop, restart or transfer plan assets depending on their needs. Referred to as "public-private partnerships" by the Pew Charitable Trust, there is no cost to the employer. Proceeds are managed by a private financial firm management for a pre-determined fee. The plans are subject to the Employee Retirement Income Security Act (ERISA) like other sponsored pension and benefit plans.
This article provides an overview of the states that currently offer savings programs, as well as those that plan to do so in the future.
Oregon was one of the first states to implement a savings program for employees of small businesses who are not otherwise eligible for a workplace sponsored pension plan. Titled OregonSaves, it is a state retirement program that is available to an employer or an individual planning for the future.
OregonSaves had almost $57 million in assets as of mid-2020. Employee contributions averaged $127 to $135 per month as of that time.
Enrollment is automatic for employees, with contributions being made through payroll deductions. Each employee account is portable and can be moved from one job to another.
All Oregon employers, regardless of employee size, must facilitate the State's program for their employees if they do not offer an employer-sponsored retirement plan. The plan is working with small employers to make the process as simple as possible.
CalSavers is available to California workers whose employers do not offer a workplace retirement plan, self-employed individuals, and others who want to increase their savings. Plan participants contribute to an Individual Retirement Account (IRA) that belongs to them.
California employers with more than 50 employees must register with CalSavers by June 30, 2021 if they do not already sponsor a retirement plan. Registration is available to all California employers with at least five employees.
The CalSavers program opened statewide in July 2019 and had $4.3 million in assets as of mid-2020. On average, participating employees contribute $105 to $120 monthly. Like the Oregon plan, the default savings rate is 5% of the employee's pay and employees are automatically enrolled after 30 days of employment. They can stop, restart or transfer plan participation at any time if they change employers.
CalSavers Retirement Savings Program is designed to simplify employer participation with no employer fees, no fiduciary responsibility, and minimal ongoing responsibilities. Employers that fail to offer participation in the plan as required are subject to fines.
In May 2021, a federal appeals court in San Francisco dismissed a legal challenge to the CalSavers plan.
Illinois Secure Choice Retirement Savings Program
Illinois launched its Secure Choice Retirement Savings Program in 2018. It is a state-facilitated retirement program that is open to employees who work for an eligible employer as well as other employees who want to enroll independent of their employer. Approximately 32,000 Illinois employees saved $8.5 million in the first year of the Illinois Secure Choice program, according to state reports.
The Illinois Secure Choice account is a Roth IRA for the employee. The default savings rate is 5% of gross pay. Employees are automatically enrolled through payroll contributions after 30 days of employment. An employee can opt out at any time. Plan participants are charged a fee of 0.75% of assets per year ($0.75 for every $100 saved), which pays for program administration and operating expenses.
The Illinois Secure Choice had 5,544 registered employers as of May 2020. There are no fees for employers to facilitate the program and employers cannot make contributions to their employee accounts. Employers serve a limited role as a facilitator. As of November, 2019, employers with 25 or more employees that have been in business for two years or more are required to participate in the program. Employers that already offer an employer-sponsored retirement plan are exempt from this legislation.
New Jersey Secure Choice Savings
The "New Jersey Secure Choice Savings Act," was signed into law in March 2019, with a two-year time frame scheduled to take effect in March 2021.
The Act requires employers that have been in business for two years and have 25 or more employees to participate in a retirement savings program administered through automatic payroll deductions. Private sector employees of businesses of any size are able to participate in the retirement savings program. Smaller or newer employers could join voluntarily. Failure to comply will result in fines to the employer.
Employees will be automatically enrolled at the leve of a 3% paycheck contribution. The annual contribution maximum is $6,000 for those under 50 years old, and $7,000 for those 50 or older.
Connecticut Secure Choice Savings Plan
Connecticut employers with five or more employees must offer a retirement plan to employees, and private employers with four or fewer employees may choose to do so. Employees are auto-enrolled within 120 days of employment, and employees must be notified of their rights within 30 days. Employers are not permitted to make contributions to the program.
The Connecticut Retirement Security Authority, a quasi-public agency, was formed in 2016 to oversee the program. The state estimates that as many as 600,000 employees may benefit from the plan.
Other States to Follow
Maryland and Virginia are also developing similar pension option for private sector employees.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.