By DENNIS GRUBAUGH
More Illinois businesses will soon be required to offer an employee retirement-plan, and the success of the state’s mandate is dependant, some say, on the way it’s administered and how many regulatory roadblocks are included.
The devil’s always in the details, said Ken Diel, a financial planner who’s dealt with retirement needs in Southern Illinois for decades.
“If they keep this program simple, this can work very effectively for employees who want to put some money away and for employers who don’t want to match anything,” Diel said.
The Illinois Secure Choice Savings Program was signed into law by former Gov. Pat Quinn Jan. 5, and takes effect June 1, with employers having until June 1, 2017, to actually have a plan in place.
The program will be mandatory for businesses that have no current retirement plan, have been in business at least two years and have 25 or more employees, Participation will be without cost to the business. All administrative costs will be covered by participant contributions.
The program will be optional for the self-employed and small businesses with up to 25 employees.
Participants will get a portable Roth retirement account funded by employee payroll deductions. The amount is set at a default rate of 3 percent per paycheck but can be changed up or down at the employee’s discretion.
Employers will be required to offer the plan, but employees can decline to participate.
Businesses that already have retirement plans are not required to participate in the new program.
Workers may opt out of the program at any time. Participants will also be able to select from higher-risk and lower-risk investment options.
An investment company contracted by the state will manage the plan.
The money in the Secure Choice account belongs to the employee who can take it and roll it over into new accounts if that employee changes jobs.
Neither employers nor the state will contribute to the account. Administrative and investment costs will be paid out of the program assets. Because contributions to the accounts are pooled and because the number of eligible participants is expected to be so large, the program will achieve cost savings through efficiencies and economies of scale. The fees are limited to 0.75 percent of all assets annually.
Recent polling conducted by Small Business Majority shows the majority of Illinois small business owners support the concept.
Offering a retirement plan helps small businesses compete in the job market and boosts morale among their employees, the organization said. According to the Small Business Majority, seven out of 10 small business owners in the state say they have been unable to offer a retirement plan for several reasons. They lack administrative capacity, can’t afford the cost of implementation, or are simply concerned over how to choose a plan.
State Sen. Daniel Biss, D-Evanston, who sponsored the measure in the Senate, said 2.5 million private sector workers in Illinois have no access to retirement savings through their employers. Workers without employer-based savings options are statistically much less likely to save for retirement.
“Retirement insecurity for private sector workers is a serious and growing problem with a surprisingly common-sense, intuitive solution,” Biss said in a statement. “Illinois has taken an unprecedented step toward making retirement a financially viable option – for the first time – for millions of workers.”
Biss said that neither employers nor the state will incur any financial risk for these portable accounts, and small business groups support Secure Choice “because it will boost their ability to compete with larger companies for the best new hires.”
While it sounds good and could serve a worthy purpose, Diel said he’ll remain skeptical pending details. He is managing member of O’Fallon-based Diel and Forguson LLC, an accounting and financial planning firm he founded in 1979. He said there are some practical considerations in rolling out the program.
“It makes good sense if it’s managed correctly,” Diel said. “But the problem is it’s, quote, ‘mandatory.’ (for employers with more than 25 workers).” That will prove cumbersome for some companies.
He used the example of a landscape business with seasonal workers who come and go. The employer could be left having to track down certain workers off season to handle retirement-plan paperwork.
“The ‘mandatory’ thing is going to be a real problem for some employers,” Diel said.
Years ago, IRAs were thought to be the answer to the long-term viability questions surrounding Social Security until the government threw in all kinds of regulations.
“We had everybody putting money into IRAs and doing well. But then unfortunately the federal government started messing around. Are they deductible? Aren’t they deductible? Maybe they’ll be deductible. They’ve made it an administrative nightmare,” Diel said. “We saw IRAs go out of favor — and they still are somewhat out of favor because it’s so complicated to determine if you’re going to be eligible for one.”
The same thing has happened to a lesser degree with Roth IRAs, which have advantages over traditional IRAs in that there are fewer withdrawal restrictions and requirements.
“We see young people putting tons of money into Roth IRAs.” But, with restrictions on income eligibility and other administrative questions, “it’s back to the same problem you have with regular IRAs,” Diel said.
The key will be to keep the rules simple, he said.
The program will be administered by a board consisting of the state treasurer (who will serve as chair), the Illinois comptroller, the director of the Governor’s Office of Management and Budget, two people with financial investment and/or retirement savings expertise, an individual representing employers, and an individual representing enrollees. Those last four members will be appointed by the governor, subject to the approval of both the Illinois Senate and the State Treasurer. Members will serve without compensation and will have staggered terms. The board will make a request for proposals to choose investment firms to manage the fund.
Newly sworn-in State Treasurer Mike Frerichs has publicly said he will seek bipartisan input as the program is rolled out.
Newly elected Gov. Bruce Rauner has not yet officially weighed in on the new law.
Many people without pensions or retirement accounts are low-wage workers, making them more likely to retire into poverty or forced to work far into old age. Biss said two-thirds of today’s retirees rely on Social Security as their primary source of income. More than one-third of retirees (and almost half of African-American retirees) rely on Social Security for more than 90 percent of their income, he said.
Researchers at the National Institute on Retirement Security estimate that the national retirement savings deficit is at least a staggering $6.8 trillion.
Unlike pension plans, Secure Choice accounts will not be funded or guaranteed by the state or employers. Pooling the individual accounts will allow for lower fees and diversified, professionally managed investments.
The law will “eliminate many of these barriers and provide small employers a new and convenient option to help their employees save money so they can enjoy their golden years,” said Jesse Greenberg, Small Business Majority’s Illinois-based Midwest outreach director.
The legislation is said to be the first of its kind implemented in the United States, although several other states are working on their own proposals.
Diel, who had heard little of the program until researching it before an interview, said a lot of businesses will be caught by surprise.
Both the employers and the state will “have all this year and next to get their act together,” he said.