Several states have started individual retirement account plans to help workers who don't have access to employer-sponsored retirement plans. This article provides an overview of the plans as well as the legal challenges they face.
Several states have enacted laws that require employers to begin enrolling employees in individual retirement account (IRA) plans established by the state. These are commonly referred to as secure choice plans, and they present one more partial solution to the retirement crisis facing millions of Americans.
A recent poll conducted by the National Institute on Retirement Security found that 88% of Americans believe that the United States faces a retirement crisis. (1) In 2016, the Department of Labor (DOL) found that approximately 39 million employees in the U.S. do not have access to any retirement savings plan. (2) The impending retirement crisis is particularly acute in California, where approximately 7.5 million workers do not have access to any employer-sponsored retirement savings plan, and nearly 50% of California workers are on track to retire with incomes below $22,000 per year. (3)
The retirement crisis is a problem that runs from coast to coast. A combined 1.2 million workers in Connecticut (4) and Oregon (5) do not have access to an employer-sponsored retirement program. According to the Connecticut State Comptroller, workers would be 15 times more likely to contribute to a retirement savings plan if it were offered through a payroll-deduction program. (6)
In Illinois, 30% of the workforce, or 2 million workers, lack access to an employer-sponsored retirement plan." A study prepared by the University of Chicago Poverty Lab and the Illinois State Treasurer's Office found that residents working in low-wage industries are far more likely to lack access to an employer-sponsored retirement plan when compared with employees in higher paid industries. (8)
Secure Choice Legislation:
One Way to Address the Retirement Crisis
Designing a solution to the retirement crisis has been a difficult task, and a nationwide solution through federal legislation seems unlikely in this unparalleled time of political discord. As a result, several states have taken on the task of enacting legislation mandating that employers must either sponsor a workplace retirement savings plan (such as a 401(k) plan) or automatically enroll employees in a state-sponsored IRA plan.
This type of plan has different names in various states but is commonly referred to as a secure choice plan, based on a 2011 report published by the National Conference on Public Employees Retirement Systems (NCPERS). The report recommends that states adopt secure choice plans to extend retirement savings opportunities to private sector employees who do not have access to such a program through their employer. (9)
Following the NCPERS report, secure choice legislation has been considered in 28 states, and variations have been fully adopted in nine states. (10) Legislation passed in California, Connecticut, Illinois, Maryland and Oregon shares a common set of features:
* Employers are required to participate in the program under state law.
* The role of the employer is limited to collecting pretax employee contributions from employee salary and forwarding the contributions to the state auto-IRA program.
* Employees are automatically enrolled in the program but may opt out at any time.
* Employee contributions are automatically set at a certain percentage, which varies from state to state.
Feasibility studies performed in two states contend that these programs can bring about a significant increase in retirement savings over the next several years. A 2016 study in California projects that 1.6 million participants will accrue a combined total of S3 billion in assets over the first six years following implementation of the state's secure choice program (now called CalSavers)." Another study performed in Illinois shows that if 20% of eligible workers remain enrolled in the state's secure choice program, they would accrue a combined total of more than $8 billion in retirement assets within the first ten years of operation. (12)
Secure choice legislation is by no means a panacea, and there has been ample debate over whether these programs can meaningfully address the retirement crisis. One investment group has applauded state efforts to enact secure choice legislation, claiming that it offers an opportunity for employers to reduce the costly compliance burdens associated with operating an ERISA-governed retirement plan. (13)
Alternatively, other business groups and nonprofit trade associations argue that adoption of secure choice legislation provides states with an unfair competitive advantage over private retirement plan providers (14) and will overburden employers by forcing them to navigate differing state laws when operating across state lines. (15) Other groups believe these state programs will ultimately lead to fewer, less competitive investment options for participants that are more expensive when compared with employer-sponsored retirement plans. (16) These state programs also will have the burden of tracking frequent changes to participant contact information and will have to continuously monitor and update hundreds of thousands of records to account for changes in employment.
ERISA Preemption Clause
The states that have passed secure choice legislation have done so on the express condition that the program must...