Over the past few years, a growing number of US states and cities have enacted legislation to create state-sponsored retirement savings programs for employees of organizations that don’t offer an employer-sponsored plan like a 401(k). Currently, 40 states have considered, studied, or moved toward implementing this type of program, though only 10 states and one major city (Seattle) have yet implemented them, writes Paula Aven Gladych at Employee Benefit News. Not all state and local policies are alike, however: While automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) are the most popular policy tool, others include multiple-employer plans and retirement savings marketplaces:
California, Connecticut, Illinois, Maryland, Oregon and the city of Seattle have adopted automatic IRAs. Massachusetts and Vermont have adopted multiple employer plans and New Jersey and Washington State have adopted marketplaces. New York, the latest state to jump into the fray, has adopted a voluntary payroll deduction IRA. …
The states that haven’t made a move yet will be watching closely to see how effective the different tools are in marketing the plans to employers and employees. … These programs are getting bipartisan support. Blue and red states are studying the issue. Every year there’s a handful of states in study mode, considering what their options are, says [Angela Antonelli, executive director for the Center for Retirement Initiatives at Georgetown University].
New York’s new program, adopted in April as part of the state’s budget for fiscal year 2019, is similar to the auto-IRAs adopted in other states, except that it is not compulsory for any employer to participate, as Paychex analyst Jessica Curtin explained at the time. The program, scheduled to begin in April 2020, uses a Roth IRA structure, so contributions are made on a post-tax basis. Employers cannot make direct contributions to the plan, but those that choose to participate must automatically enroll their employees at a contribution rate of 3 percent of their paychecks; employees may then choose to opt out.
The US Treasury has announced that it is winding down the “myRA” program started by former President Barack Obama’s administration in 2015 as a retirement savings option for low-income Americans, and that participants will be allowed to roll their money into private Roth IRAs, the New York Times reports:
Jovita Carranza, the United States treasurer, said in a statement that demand for the accounts was not high enough to justify the expense. The program has cost $70 million since 2014, according to the Treasury, and would cost $10 million a year in the future. … The closing of myRA is the latest step taken by the Trump administration to reverse Obama-era savings initiatives and investor protections.
The myRA program was launched by the Obama administration in 2015 to encourage US citizens to save more for retirement. Marketed as a “starter” retirement account for low-income individuals without employer-sponsored retirement plans, myRAs invested in the government securities investment fund and promised no risk of losing money. However, critics of the myRA questioned whether it was really all that useful as a retirement savings vehicle, noting that the fund’s low level of risk meant it also offered very low returns.
According to the Times, although 30,000 Americans opened myRAs, only 20,000 ever contributed to them, with a median account balance of $500 and total contributions amounting to $34 million. Mark Iwry, the chief architect of the program, told the Times the decision to close the program, which took six years to design, after less than two years was shortsighted and “reflect[ed] a fundamental misunderstanding of its purposes and potential as a long-term investment in working families’ economic security and financial independence.”
In a close vote, the US Senate on Wednesday passed a resolution scuttling a rule put in place by the Obama administration’s Labor Department to exempt automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) created by states from the Employee Retirement Income Security Act (ERISA), Investment News reported:
The bill now heads to the desk of President Donald J. Trump, who is expected to sign it into law. The Senate voted 50-49 in favor of H.J. Res. 66, the joint resolution overturning the Obama-era Department of Labor regulation. The vote was along party lines, with Republicans voting to overturn it. The bill wasn’t subject to a Democratic filibuster. …
If Mr. Trump signs the pending resolution, it would likely slow or halt development of auto-IRA programs by other states, at least a half dozen of which introduced auto-IRA legislation 2016 alone.
In March, the Senate passed another resolution by an identical margin, withdrawing the ERISA “safe harbor” rule for auto-IRA plans created by cities and counties. Auto-IRAs were widely expected to be prime targets of the Trump Administration’s deregulatory agenda. Ashlea Ebeling at Forbes explains how Wednesday’s resolution will affect the states:
During its last year in the White House, the Obama administration took several steps to try to close the US’s retirement savings deficit, launching the myRA, a retirement account marketed to low-income individuals that invests in the securities investment fund and promises no risk of losing money, and issuing new rules exempting automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) from the Employee Retirement Income Security Act (ERISA), opening the way for states to experiment with ways to encourage retirement savings through state-run programs for employees whose organizations don’t already offer a retirement plan.
Five states—California, Oregon, Illinois, Maryland, and Connecticut—have all passed laws recently requiring employers to either provide a retirement plan for their employees or connect them to a portable, state-run program. State-sponsored auto-IRAs are controversial in the business community: A January survey of small business owners by Pew Charitable Trusts found that most supported auto-IRAs as a concept but were skeptical of states or the federal government sponsoring them rather than private mutual funds or insurance companies. The US Chamber of Commerce has also come out in opposition to auto-IRAs.
In any case, the Trump Administration and the GOP-controlled Congress may shut these programs down before they even get started. Congressional Republicans are now working to withdraw the federal approval the previous administration gave these programs to go ahead, as Penelope Wang explains at Money:
Portland, Oregon (Checubus/Shutterstock)
A retirement readiness crisis is looming in the US, with women, minorities, and low-income workers particularly unlikely to have sufficient savings to retire at a reasonable age, if ever. A Pew Charitable Trust study earlier this year found that more than 40 percent of full-time private sector employees lacked access to either a pension or an employer-provided retirement plan like a 401(k).
To help close this gap, the federal government last year introduced the myRA, a retirement account marketed to low-income individuals that invests in the securities investment fund and promises no risk of losing money—but critics of the myRA have questioned its utility as a retirement savings vehicle. Several states, meanwhile, are experimenting with a different approach: California, Oregon, Illinois, Maryland, and Connecticut have all passed laws requiring employers to either provide a retirement plan for their employees or connect them to a portable, state-run option.
These states are home to one in five Americans, so the success or failure of these programs could have a big impact on how Americans save for retirement and the government’s role in encouraging them to do so. Bloomberg’s Ben Steverman checks in on these programs, looking at what the states are currently working on and the challenges ahead: