My home state of Illinois is not the first place that comes to mind for innovative approaches to retirement savings. We are much more infamous for our pension plan for state workers, which is the worst-funded in the country.
But Illinois just became the first U.S. state to adopt a promising new approach to a big problem in the nation’s retirement saving system: the lack of workplace saving options for low-income workers. Starting in 2017, companies that do not offer retirement plans will be required to automatically sign up their workers for a state-sponsored Roth IRA account, funded by a 3 percent (or higher) after-tax deduction from their paychecks, with the growth accruing tax-free. The requirement applies to employers with 25 or more workers who have been in business at least two years, and workers can opt out if they choose.
Given the state’s pension woes, the new Illinois Secure Choice Savings Program (ISCSP) may seem like hubris. But the state will not be contributing to ISCSP accounts, and investment management will be farmed to an outside firm. And variations of Secure Choice are gaining ground around the country, with proposals in more than half of the states. “We’ve hit a critical mass on this concept,” said Sarah Mysiewicz Gill, senior legislative representative at AARP, which has been working with proponents at the state level to advance the idea.
Encouraging people to save seems like a mom-and-apple-pie concept. The financial services industry never misses an opportunity to push it; to wit – campaigns reminding people that they don’t have to spend the money they’re saving on lower gasoline prices, but can instead sock it away for retirement. And Secure Choice takes aim at a critical problem in our retirement saving system – overall falling level of retirement account ownership, and the low rates of ownership among lower-income households.
But there is plenty opposition to these plans. Business lobbying groups have opposed Secure Choice because it mandates businesses to create the payroll deduction mechanism. But State Senator Daniel Biss, sponsor of the Illinois plan, says the real opposition came from the life insurance industry. “A laundry list of every business association in the state was listed among the opponents,” he says. “But when we poked under the surface we found much of the opposition was nominal. The real passionate opposition came from the the life insurance industry, which is very powerful. They decided at the national level that this is an existential threat to be defeated at all costs.”
I spoke to the American Council of Life Insurers (ACLI) for my Reuters column this week. ACLI acknowledges that the gaps in access to workplace coverage is a problem, but claims that plans like Secure Choice pose unnecessary costs and risk for government and small business.
But it’s also clear that some segments of financial services just fear being cut out of the action on a huge new market. “We haven’t been at the table helping to craft these plans,” said John Mangan, ACLI’s vice president of state relations. “Our industry has been in the retirement business for 100 years and we think we’re doing a great job with employers who adopt their own plans.”
I heard the same concern from the Financial Services Institute (FSI), which represents independent broker-dealers. FSI says it didn’t oppose the Illinois plan, but has said fighting other initiatives around the country will be a top legislative priority this year. “Some of these bills expressly state that financial advisers can’t be involved in the process whatever,” says Robert Lewis, FSI’s vice president of legislative affairs.
Insurance lobbyists say they support non-mandatory national savings plans, like the Obama Administration’s myRa, which is rolling out this year. They oppose anything mandatory.
Mangan says there are better ways to close the gap, such as new low-cost, multiemployer 401(k) options for small businesses at the federal level, and at the state level, expanded savers credit and creation of certified networks of insurance providers who can provide low-cost payroll deduction options for employers.
These two approaches will be competing state-by-state over the next couple years, and we’ll have a chance to see which produces results.
May the best ideas win – along with the workers who need better options for building retirement nest eggs.