The state of Illinois passed the Illinois Secure Choice Program Act, which became effective in June of 2015. Like many other similar state retirement programs, it mandates that all employers that do not offer a retirement plan to their employees participate in the state plan.
Employers who will fall under the mandates in the coming year may wonder whether this plan or an alternative is the best choice for them.
It’s estimated that more than 2.5 million workers in Illinois do not have access to a work-sponsored retirement plan. With increased reliance on social services, which is ill-equipped to provide a comfortable living, it’s important to help employees become more involved in their own retirement planning.
The Illinois program is patterned after other successful programs, such as NEST in the U.K., KiwiSaver in New Zealand, and OregonSaves here in the U.S. It’s intended to provide a savings option for those who don’t already have one, not as a replacement for existing retirement plans.
This program, like several others, is essentially a payroll-deduction Roth IRA. It is for companies that have been in business at least 2 years, and have at least 5 employees, and do not already offer a retirement plan to employees. Individuals who want to participate can also sign up without any involvement from an employer.
The accounts essentially belong to the employee, and can move with them from job to job, with no need for a rollover or other change.
Employees are automatically enrolled in the plan, at a default contribution rate of 5% of gross income. Participants can opt out, or they can change their contribution level any time. They can also choose auto-escalation, which increases their contribution by 1% per year, up to 10% of the gross income.
The program is available at no fee to employers, and they have no fiduciary or plan management responsibility. The employer is also barred from contributing to employees accounts. Their only obligation is to enroll, and to facilitate the payroll deduction.
After an initial pilot phase that began in May 2018, the Illinois Secure Choice program has five waves of implementation scheduled.
Employers who neglect to register for the program are subject to penalties of $250 per employee for the first calendar year and $500 per employee after the first calendar year.
The benefits of the Illinois program are clear: no cost and no liability for employers means the main barriers to work-provided retirement planning are removed. A closer look reveals some potential downsides.
1) Income Limits: If employees earn too much, they are not eligible for the program. It’s also not an effective vehicle for those who are close to retirement.
2) Contribution Limits: Far lower than a 401(k), Roth IRAs only allow contributions of $6,000/yr. If an employee has an additional private IRA, they’ll need to track these limits themselves.
3) No Matching: Employers are barred from making matching contributions to employee accounts.
4) No Protection: The Illinois program is not subject to worker protetctions under ERISA, which requires fiduciary oversight, plan information to be provided to participants, and the establishment of a grievance and appeals process.
5) No Tax Benefit for Employees: Since Roth IRA contributions are made post-tax, workers looking for more immediate tax benefits will not get them. By contrast, 401(k) plans offer both pre- and post-tax contributions.
6) Poor Investment Options: The small selection of investments available to Illinois employees may not be suitable for everyone. And, the default age-based target-date funds have been underperforming and may not be very helpful in accomplishing wealth building.
7) Fees to Employees: Participants pay about 0.75% per year, higher than the average 401(k) fee of 0.45%-0.50%. And, fees are likely increase over time.
If an employer is required to participate in something, they may find a 401(k) to be a better option for their business than the state-mandated program for several reasons. Most of these reasons are apparent when the downsides of secure choice programs are clearly understood, but three main benefits stand out.
1) Tax Benefits: Implementing a new 401(k) plan can potentially qualify an employer for up to $5000/yr in tax credits for 3 years. And, matching contributions are usually tax deductible. Many employers find they prefer to give the money to employees rather than spend it in taxes.
2) Employee Retention: A surprisingly high percentage of employees would rather receive additional benefits than a pay raise, and more than half consider benefits when deciding whether to accept a new job.
3) Less Burdensome than in the Past: Especially for small businesses, traditional 401(k) plans have been expensive, complicated, and come with excessive liability. New platforms like 401GO provide employers with an option that is inexpensive, unbelievably fast, and very low in administrative burdens and fiduciary liability.
New platforms like 401GO are becoming available now that give smaller employers flexibility and freedom that they never had access to before. For less than the cost of a gym membership, a business owner can give workers a robust 401(k) plan that levels the playing field and lets them compete in the labor marketplace.
Consider these features: