California Moves Ahead with Automatic IRA Law

By Karen Harris, Shriver Center

The U.S. is facing a growing debt crisis, the baby boomer generation is entering retirement, people are living longer today than ever before, and long-term health care costs are rising to unmanageable levels for many older Americans. Given the retirement demands facing the nation and its retirees, saving more for retirement has never been more important, yet not enough Americans save enough for a retirement free of financial hardship and worry.

A major cause of this lack of long term savings retirement savings, according to a recent report by the Woodstock Institute and IABG, is a lack of opportunity: 50% of workers in Illinois lack access to employer-sponsored retirement savings plans.  To increase access to retirement plans, several states have stepped in to provide workers with an option to save for retirement through state sponsored private employer retirement savings plans in the absence of an employer offered plan. California recently became the first state to pass a law creating an automatic enrollment individual retirement account (IRA) program and Illinois is currently considering similar automatic IRA legislation.

The California Source Choice Retirement Savings Trust Act would create a statewide retirement savings plan for private sector workers without access to an employer sponsored retirement savings plan.  Under the law:

• All California employers with more than 5 employees not offering a retirement savings option would be required to offer the new state IRA program.
• Eligible employers not electing to offer their own savings option, would be required to automatically enroll all employees into a 3% payroll deduction Auto IRA plan, called the California Secure Choice Retirement Savings plan.
• Employees could opt-out of the program and/or change their deduction amount.
• All investments would be placed in a pooled trust fund administered by an appointed 9-member board that contracts with 3rd party firms to manage, invest, and administer the funds.  The trust fund would provide a modest guaranteed rate of return through the use of private insurers who will insure the return rate and bear any liability for losses. Before the law is implemented several factors like possible preemption by the  Employee Retirement Income Security Act (ERISA) and a preliminary market analysis will have to be assessed.

Unfortunately, before the law can be implemented several conditions must be met.  First, a preliminary market analysis must be paid for by an entity other than the state.  Second, the proposed plan must be approved by the IRS and be deemed, by the U.S. Labor Department, not to be an employer sponsored plan subject to the Employee Retirement Income Security Act (ERISA).   Finally, the California legislature would need to enact legislation approving the final plan.

The Illinois General Assembly is currently considering a similar bill, SB3278/HB4497, which would also create a statewide automatic IRA program for workers in Illinois.  All employers not currently  offering a retirement plan that employ between 10 and 100 employees would be required to automatically enroll their employees into a 2% payroll deduction IRA type account administered by the State Treasurer’s office.  Similar to the California program, employees would be able to opt-out or change their contribution amount. Similar to the California board, the State Treasurer would contractwith 3rd party investment firms to invest and administrate the fund.  Unlike the California plan, employees could choose from a limited range of investment options or be put into a default investment. Most importantly, unlike California, the Illinois plan does not establish a guaranteed rate of return.

Both pieces of legislation address a growing problem of retirement insecurity by developing a concept that promotes both progressive and conservative values.  They  address equal access, while simultaneously promoting personal responsibility and individualism. Although there is concern that states cannot afford such programs given their budget crises, states should remember that there are benefits beyond those enjoyed by enrollees. These types of investment strategies ultimately pay dividends to the states in greater wealth owned by their citizens.

IABG’s efforts to pass Automatic IRA legislation in Illinois will increase access to a vital tool people need to build financially secure retirements. Learn more about IABG’s work and the importance of Automatic IRAs at IABG’s upcoming conference in Champaign, IL on November 15th & 16th. The conference will highlight Automatic IRAs in a workshop featuring Karen Harris – Director of Asset Opportunity at the Shriver Center, Spencer Cowen – Vice President of Applied Research at the Woodstock Institute, and David John – Senior Research Fellow in Retirement Security and Financial Institutions at The Heritage Foundation. Register now for the statewide conference.

This blog was written by gues blogger, Alex Hoffman. Alex serves as an Americorps VISTA with the Sargent Shriver National Center on Poverty Law