Illinois has become the first state in the nation to adopt an automatic enrollment IRA program. The intent of this program is to provide a retirement savings option for private-sector employees who do not have access to a retirement plan through their workplace.
Participation in the Illinois Secure Choice Savings Program will be mandatory for every Illinois employer that has 25 or more employees, has been in business for at least two years, and has not offered a retirement plan in the preceding two years. Small employers with fewer than 25 employees who are exempted from mandatory participation in the program may voluntarily choose to participate.
Employers will be required to automatically enroll eligible employees and deposit their contributions through payroll deduction. Employer contributions, however, will not be required. The Illinois Secure Choice Savings Program Fund will hold participants’ contributions in individual accounts that meet the IRS requirements for Roth IRAs.
Employees will be able to select a contribution level (either a percentage of wages or a set dollar amount) or elect to opt out of the program. If the employee fails to opt out or to select a contribution level, the employer will be required to deduct three percent of the eligible employee’s wages for deposit into the program, provided this amount does not exceed the IRA contribution limit for the taxable year.
The investment option will be a life-cycle fund with a target date based on the employee’s age. The legislation also provides for the establishment of other investment options, including a conservative principal protection fund, growth fund, secure return fund, and an annuity fund.
Auto IRA legislation is not a new concept, having first been introduced at the federal level in early 2006, by Senators Jeff Bingaman (D-NM) and Gordon Smith (R-OR), and Representatives Phil English (R-PA) and Rob Simmons (R-CT). The concept is supported by President Obama and is the centerpiece of the Obama Administration’s retirement policy. The President called for implementation of a national auto IRA program in his 2014 State of the Union address and has included an auto IRA provision in each of his fiscal year budget proposals since first taking office. Despite the President’s support, no action has been taken on auto IRA legislation at the federal level.
Instead, states—including Maryland, Oregon, and more than a dozen others—have all explored or are exploring options for workers not covered by workplace retirement plans.
In 2012, Massachusetts passed legislation that authorizes the state treasurer to sponsor a qualified defined contribution plan for employees of not-for-profit employers. California passed legislation the same year to establish the California Secure Choice Retirement Savings Program. But a market analysis must be conducted to determine whether the legal and practical conditions for implementation of the program can be met. Once this is completed, additional legislation must be enacted to implement the program.
Legislation that would require Maryland employers to adopt auto IRAs for their employees got a full legislative hearing in the Maryland General Assembly earlier this year. And, legislation has recently been introduced in Oregon that would create an Oregon Retirement Savings Board. The Board is tasked with developing a state-run retirement program for private-sector employees not covered by a retirement plan that meets the Board’s requirements.
The Illinois Secure Choice Savings Program was signed into law by outgoing Governor Pat Quinn on January 4, 2015, but the program faces a number of hurdles before it becomes operational. The program is to be run by a seven-member board that will be responsible for the program’s design, establishment, and ongoing operations.
The legislation mandates that the program be implemented and enrollment of employees begin within 24 months of the program’s effective date, which is June 1, 2015. But the board may delay implementation of the program if it does not obtain adequate funds to implement the program within the 24-month time period. Funding for the program may come from the state, federal, or local government, or any other person, firm, partnership, or corporation.
The board also must request a written opinion from the Department of Labor to determine whether the program would be considered an employee benefit plan under the Employee Retirement Income Security Act (ERISA), and whether the IRA arrangements offered under the program would receive the same favorable tax treatment accorded to Roth IRAs. If the program does not receive favorable tax treatment, is determined to be an employee benefit plan under ERISA, or subjects employers to liability under ERISA, then the board may not implement the program.
As such, the earliest that the program could start would be 2017. Once the board opens the program for enrollment, Illinois employers will have nine months to establish a payroll deposit retirement savings arrangement to allow employees to participate in the program and enroll all employees who have not opted out of participation.
Unlike the President’s myRASM proposal (a voluntary payroll-deduction IRA program), which has recently become available, the Illinois Secure Choice Savings Program is mandatory—not voluntary—so potentially millions of Illinois workers could be participating in the program once it opens for enrollment.
It appears that the Illinois Secure Choice Savings Program might provide few opportunities for credit unions to participate, as all employee contributions are made to the Illinois Secure Choice Savings Fund, rather than into IRAs at private-sector financial organizations. But opportunities may exist for private-sector organizations as the board designs the program, and selects an IRA trustee and other service providers and third-party administrators to operate the program.
The long-term effect of auto IRA programs on credit union IRA programs remains unclear. The benefits to eligible employees are no greater than they already are receiving if they are contributing to a credit union IRA. And, because most credit unions offer IRAs with low minimum balance requirements and funding by payroll deduction, there are few barriers that prevent members from opening IRAs. But given the success of auto-enrollment in 401(k) plans, and inaction on auto IRA legislation at the federal level, states considering auto IRA legislation are likely to keep a close eye on the Illinois program. The same can be said for credit unions.