States helping workers save for retirement
Oregon is the latest state to approve a state-sponsored retirement plan for those employees who don’t have access to a retirement plan at work.
According to a 2011 study by the Oregon State Treasury, about 45% of employed people in Oregon don’t have access to an employer-sponsored retirement plan and of those who do have access, nearly one-quarter do not enroll.
Oregon Gov. Kate Brown signed the Oregon Retirement Security Bill, HB 2960, into law in June to create the Oregon Retirement Savings Fund Board, which is tasked with forming a state-run defined contribution plan that is available to all employees through payroll deduction.
“A number of states are looking to establish variations of the mandatory payroll deduction IRA for workers when there is no employer plan,” says Brad Campbell, counsel for Drinker Biddle & Reath LLP in Washington, D.C. “Obama clarified that ERISA does not apply to state-based IRA programs. I’m not sure mechanically how they will do that.”
A proposed regulation exempting states from ERISA coverage when offering investment vehicles to workers on a payroll deduction basis was sent to the Office of Management and Budget on Sept. 1, he says.
Under the Oregon plan, employers don’t have to contribute to the plan, but the idea is that workers will be automatically enrolled in the plan at a contribution rate set by the board. They will have to opt out if they don’t want to participate. The retirement accounts are portable, so workers can take them with them when they change jobs.
Employers that offer 401(k), 403(b) or other defined contribution or defined benefit plans do not have to participate in the state-run plan.
“This is a huge win for those who worry about how to save for their retirement years,” said Oregon State Treasurer Ted Wheeler. “By providing a voluntary, portable and secure way for Oregonians to consistently save some of the money they earn, we will provide security for families, communities and the state’s bottom line.”
The goal of Oregon’s plan, which is slated to go into effect no later than July 1, 2017, is to be voluntary, easily accessible and easy for employees and a minimal burden on small businesses. The funds will be pooled and professionally managed by a private-sector plan administrator.
Under the plan, businesses will not be exposed to fiduciary liability, the state will not guarantee returns and the state will not be liable for investment losses. The plan, funded through account fees, will be self-sustaining and cannot be raided by the legislature, Wheeler said.
Oregon joins California, Illinois and Connecticut, who have also passed state-run retirement plan initiatives.
California’s governor signed the California Secure Choice Retirement Savings Trust Act into law back in September 2012. To date, the state has raised the necessary funds to conduct a market analysis and legal analysis of the program. The report is expected to be completed in late 2015. As proposed, the California plan would require all businesses with five or more employees to enroll them in a new type of savings plan based on IRAs. The funds would be professionally managed and employees would be automatically enrolled in the plan at about 3% of their wages.
The Illinois Secure Choice Savings Program Act was signed by Illinois Gov. Pat Quinn on Jan. 4, 2015. That makes Illinois the first state to fully enact legislation requiring that private-sector employers offer their workers retirement benefits, according to the Pension Rights Center. That program will be implemented by June 1, 2017.
It requires employers with 25 or more workers, that don’t already offer some sort of retirement plan, to automatically enroll their workers over the age of 18 into the state-run payroll-deduction Roth IRA. The program is available to smaller businesses on a voluntary basis. Costs for the plan will be paid for through employee contributions.
The Connecticut General Assembly passed legislation in May 2014 that sets the stage for a state-run retirement savings plan for private-sector workers who don’t have access to a workplace pension or defined contribution plan. The bill provided funds to create a 14-member Retirement Security Board that is conducting a market feasibility study for a new plan and developing an implementation plan, all which must be completed by April 1, 2016.
At least 21 other states have introduced similar bills in their state legislatures but have not acted on them yet.
Paula Aven Gladych is a freelance writer based in Denver.