To ward off a retirement savings crisis, Illinois is sweeping hundreds of thousands of small-business employees into new investment accounts to help them save.
Under a 2015 state law, about 15,000 Illinois companies with more than 25 employees must have plans in place by Nov. 1, but the process of bringing them into compliance has been slow going, with only about one-fifth on board. If companies don’t come up with their own plans, they’re expected to register for a new state-sponsored Roth IRA program called Illinois Secure Choice.
The 2,700 companies signed up for the Illinois program have attracted $7.43 million in employee assets so far, but the state ultimately expects $1 billion. Illinois has become a test case for states across the country considering similar moves to ensure millions of workers at small enterprises like bars, stores and restaurants have money to lean on later in life. But employees have faced some high fees in the state programs.
“The private sector had basically ignored some of these industries, or priced them out,” says Illinois Treasurer Michael Frerichs, a Democrat. “They haven’t marketed to these low-income and high-turnover employees. We all know those people still need to save for their retirement.”
The state-sponsored program seems like a win-win-win, giving workers a start on saving for retirement, allowing employers to offer a new benefit at little cost, and eventually cutting state costs in caring for seniors. Still, the state plan’s automatic 5 percent deduction from employee paychecks (with an opt-out option) is also a potential bonanza for big asset managers like New York-based Blackrock.
So far, Secure Choice has drawn 30,600 enrollees statewide, with about half from the Chicago area. The state has been phasing in the law in waves over the past year, and the final, largest group—companies with more than 25 employees—is required to comply by Nov. 1.
Leonor Borja, controller at her stepfather’s West Side property management company, Urban Alternatives, is meeting the new requirement by adopting the state’s plan. Other than time spent on getting herself and employees up to speed, and adding a deduction to state payroll tax paperwork, there was no cost to implement the plan.
She was surprised that about a third of her 23 employees are sticking with the plan’s automatic 5 percent deductions, even though they can opt out anytime (her company had to comply with even 23 employees because last year it filed 25 W-2s). The office staff and property site workers typically balk at anything that eats into their pay, she says. There may have been more participation if a presentation by the state’s vendor, Ascensus, had been delivered in Spanish in addition to English, she says, but overall, she’s pleased with the program.
Penalties for not complying are $250 per employee for the first year and $500 per employee for each subsequent year. “Since the program is new, our goal is to work with employers to bring everyone into compliance, so there has been no rollout of enforcement or fines yet, and our focus is on helping employers to register and begin facilitating the program,” says Courtney Eccles, who is overseeing the program in the Illinois treasurer’s office.
EYES ON THREE STATES
Illinois follows Oregon in implementing such a program, and California will roll one out next year. “Everybody is watching these three big states,” says Ashvin Prakash, director of product development at Ubiquity Retirement + Savings, which specializes in providing employee savings programs for small businesses. His San Francisco-based company, which has been in business 20 years, competes with the states’ programs and has seen other rivals multiply since states started passing the legislation in recent years. His company’s founder, Chad Parks, locked arms with state legislatures to develop the laws and programs, creating more demand for his services.
The main pushback to the programs so far has come from large, global companies not subject to the state laws because they already offer such plans. They were ticked off by the task of seeking exemptions in every state. A trade group representing them sued Oregon over its program and reached an out-of-court settlement with the state agreeing to exempt its members. Illinois fended off such a lawsuit by agreeing to a similar exemption.
The state trend grew out of a bipartisan effort championed by think tanks, nonprofits like AARP and businesses that felt the federal government wasn’t addressing the retirement savings crisis, says Angela Antonelli, who served in the administrations of both President Bushes and now leads Georgetown University’s Center for Retirement Initiatives to assist state implementation.
“States understood there were going to be tremendous budget and economic consequences,” Antonelli says.
Ten states and one city have enacted variations of the Illinois law over the past seven years, and 33 more have introduced similar legislation, she says.
Employees in the Illinois plan face fees equal to three-quarters of 1 percent of their assets annually, and that’s not necessarily low, given that investment fees industrywide are under pressure from low-cost passive-investing trends. Oregon’s fees are even higher, at 1.05 percent, but it’s planning to lower them to less than half that, Antonelli says.
State and fund manager interests are aligned in luring as many people as possible to the plans. The auto-enroll aspect of such a large group of employees makes the state programs attractive to big investment managers who might otherwise not be interested in such small accounts. “It makes a much more compelling business case for those investment providers,” Prakash says.
In the Illinois plan, Blackrock, State Street and Charles Schwab offer 15 fund choices. Frerichs acknowledges that employees are much more likely to stick with the plans if they’re automatically enrolled at work.
By contrast, Ubiquity programs are mainly opt-in, Prakash says. An advantage of his company’s 401(k) program is that employers can make contributions, whereas the state’s Roth IRA can’t legally accept employer contributions. He also touts his firm’s fees. “As you’re starting out, the state plan may seem inexpensive, but that can grow to a significant cost over years of savings,” says Prakash, whose firm charges a $60 flat fee, plus any fund manager fees for access to 30,000 funds.
Employees considering the new retirement savings had best study the options.