By ALAN J. ORTBALS
With two years before the program goes active, the state’s treasurer says he is taking a careful approach to implementing Illinois’ first-of-its-kind employee savings law.
Gov. Pat Quinn signed the Illinois Secure Choice Savings Program Act (S.B. 2758) on Jan. 4, 2015.
The new law will require certain employers to provide an automatic payroll deduction for savings in a Roth IRA for employees who are over age 18 and who do not opt out of the program. Employers who have 25 or more employees in Illinois, have been in business for at least two years, and have not offered their employees tax-favored retirement benefits in the preceding two years will be required to set up the savings plan for their employees when the program becomes active sometime in 2017. Those with fewer than 25 employees will be able to participate on an elective basis. Employers will have up to nine months to establish the plan after it opens for enrollment.
A target date for opening enrollment has not yet been set by the Treasurer’s Office which is responsible for the rollout.
“It is important that we roll this out correctly,” said Illinois State Treasurer Michael Frerichs. “Everyone remembers that when the Affordable Care Act came out, the websites crashed. I think they have overcome a lot of those problems; they have gotten things up and running; and have made a great impact for millions of Americans. But, the program did not initially work as advertised. We’re going to take these two years to make sure that the Secure Choice Savings Program is up and running; test it; and make sure that we have a good and smooth rollout.”
The bill was passed by the legislature last December, and Frerichs said that it did so pretty much on a party line vote with Democrats in favor and Republicans against. Frerichs, who was then a Democratic senator representing Illinois’ 52nd District, said that he was surprised by the partisanship as the idea for such a program originated with the Heritage Foundation, a conservative think-tank.
“The Heritage Foundation started pushing this several years ago when there was a lot of talk about not being able to fund Social Security,” Frerichs said. “The idea was that, ‘Hey, rather than the Federal government doing this why don’t we just help people save their own money?’ The employer is already taking money out of paychecks for state taxes and other things, so I don’t see it as a big burden.”
The Secure Choice Savings Program will require affected employers to automatically enroll eligible employees who do not opt out and to facilitate payroll deductions for those employees. The statute provides that employers will not be treated as fiduciaries of the program or liable for program investments, design or benefits. No employer contributions are required.
The Treasurer’s Office is charged with administering the program but, Frerichs said, he will put out a request for proposal to find a fiduciary who can manage it in a way that provides good service for people at low cost.
Open enrollment will occur at least once a year. Affected employers will forward the payroll deductions to a system administered by a seven-member state board that will supervise the investment of the assets, engage investment managers, and perform similar supervisory functions. Employers’ activities will also include distributing materials provided by the state board. Penalties for an employer’s violation will be $250 per employee per year, with the amount increasing to $500 for violations with respect to employees who continue to be treated as unenrolled in years after the initial assessment.
Enrollees may contribute up to the IRA maximum, with a default level of 3 percent of wages for those who do not elect a different percentage or amount. Enrollees will have the investment options provided by the state board.
Frerichs said he voted for passage of the program when he was in the state senate and thinks other states will follow Illinois’ lead.
“We have a real problem with retirement security in this country,” Frerichs said. “Too many people are not saving adequately for retirement. I saw something recently that a third of Americans will rely on Social Security for 90 percent of their retirement funds; they have less than $50,000 saved for their retirement; and the average Social Security check is somewhere just under $16,000 a year. Those folks will be unable to enjoy their golden years. I think this is a smart way to help people save for retirement,” Frerichs added. “It won’t help people who are near retirement today — there isn’t enough time — but for generations of younger people hopefully they’ll be able to amass a nice little nest egg without having to put much thought into it.”
While Ken Diel, founder of Diel & Forguson LLC likes the concept, he says he doesn’t like the mandate and he doesn’t know where the cash-strapped state of Illinois is going to get the money to implement or administer the program.
“I like the concept,” Diel said, “but I hate the fact that the state is going to mandate it on me and that I have to do it no matter what. I think it’s kind of oppressive that I don’t have a choice; I have to go into the plan unless all my employees elect out of it; and they’re automatically going to have 3 percent coming out of their checks.
“And, do you really think it’s not going to cost the state any money? Somebody has got to put this out to the business community; somebody’s got to collect the money; somebody’s got to monitor this thing. I feel this is going to be a substantial investment for the state.”
But Frerichs points out that only 15 percent of people who are not in an employer-sponsored savings program save for retirement. He said he thinks that number can be flipped on its head if saving is made easy.
“Inertia is such that once it’s already coming out, people are reluctant to change it,” Frerichs said. “But, if it is not coming out, then inertia works against saving. Most people don’t go out and find a financial advisor and have the discipline to deposit money into a savings account every month themselves.”