Author Topic: New Illinois law enrolls 2.5 million workers in retirement plans  (Read 5281 times)

Sid888

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New Illinois law enrolls 2.5 million workers in retirement plans
« on: December 10, 2014, 08:09:12 PM »
A new "opt out" private sector retirement savings plan was just passed in Illinois (see below).  The outgoing Governor has said he will sign it into law.

http://www.chicagobusiness.com/article/20141203/BLOGS02/141209872/new-illinois-law-enrolls-2-5-million-workers-in-retirement-plans

It seems like a good tool to encourage savings and educate the masses on the importance of saving early for retirement, compounding and help them learn the basics of investing.   Should other states also enact similar legislation?

After lurking on this site for a while and educating myself on how to retire early (or at least securely), I am amazed at how anyone could not support this Bill.  Without getting too partisan, why would a company (or a legislator with a pension) not support an opt out retirement program for a worker given the utter lack of proper savings in this nation?

As an aside, The Chicago Tribune blasted Republicans yesterday for not supporting it.

http://www.chicagotribune.com/news/opinion/editorials/ct-quinn-biss-illinois-republicans-retirement-edit-20141209-story.html



New Illinois law enrolls 2.5 million workers in retirement plans
By Greg Hinz December 03, 2014

With not a vote to spare, Illinois lawmakers approved a bill that would enroll 2.5 million private-sector workers in a retirement savings program unless they opt out.

The action came yesterday evening when the state Senate voted 30-25 to ratify amendments to S.B. 2758, sponsored by Sen. Daniel Biss, D-Evanston. Exactly 30 votes were needed; two senators did not vote.

Earlier in the day, the House passed the measure by a somewhat wider 67-45 margin. Gov. Pat Quinn is expected to sign the Biss bill into law.

No American state now has anything quite like the program, which would apply to employees of firms with at least 25 workers who do not have access to an employer-provided retirement account. That may explain some of the opposition, especially from the insurance industry and Springfield Republicans, who say the measure was rushed through and should have been left for Gov.-elect Bruce Rauner to consider.

But Biss said a similar measure was endorsed both by President Barack Obama and GOP nominee Sen. John McCain in the 2008 election, and he expects great things from it.

'UNDERDISCUSSED'

"Of all the economic questions affecting the middle class, retirement is the one most underdiscussed," he said. "We talk about jobs and so forth. But people are petrified" when retirement comes up.

Under the measure, qualifying employees will be asked now or when they are hired whether they want to contribute 3 percent of their salary to a retirement account. Unless they say no, the money will be deducted from their check, just like taxes, and go into an individual Roth Individual Retirement Account that will be tax-free after retirement.

Operating much like the state's Bright Start college savings program, a panel including the state treasurer, budget chief and several outside directors named by the governor will hire a private firm that will run the program and offer various investment options. The program, called Secure Choice, will be portable, carrying over to a new employer if a worker changes jobs. Employees can contribute more or less than 3 percent of their salary if they choose.

"For two-thirds of today's retirees, Social Security is their primary source of income," said Biss, a former mathematics professor. "The opportunity to save using a Secure Choice account will prevent many seniors from facing appalling choices."

Biss disputes charges that the plan will place a big new burden on business. Companies merely have to offer new hires a form to decline enrollment and then integrate withholding into their regular payroll software, he said.

Still, former Illinois Treasurer Alexi Giannoulias ran into political problems when the Bright Start program underperformed during the financial crisis of several years ago. But one outside research organization, the Chicago-based Woodstock Institute, said the program "will help millions of Illinois workers save for retirement."

Fees will be limited to a maximum of 75 basis points, or 0.75 percent, of the value of an individual's savings account. The bill takes effect June 1, with a two-year setup period, so no savings accounts will be established until June 2017.

Note: Daniel Biss' profession has been corrected.

joleran

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #1 on: December 10, 2014, 10:56:12 PM »
Seems like a nice little money grab by the corrupt politicians that will hire the future fund administrators.  0.75% fees are quite high, and I'm guessing half the people will forget about the fact that they have it, 90% of the rest will complain about losing money, and a good half a percent might accidentally over-contribute to an external Roth IRA because they don't realize that's what this is.  A few years down the line a good third are going to figure out that they can withdraw their Roth contributions tax-free at any time and go on a nice vacation.

The article also says "the money will be deducted ... just like taxes", which is misleading at best, since the Roth is post-tax money.

All of those negatives aside though, of course it's good for some of these people to be saving more than nothing, but I can't help but think this is the bad sort of government that is addressing the symptoms and not the disease while selling you snake oil besides.

MayDay

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #2 on: December 11, 2014, 05:33:33 AM »
I really wish there was a single retirement savings system, not this awful hodgepodge of ira, Sep-ira, Roth ira, 401k, 403b, etc etc etc.

It would be so much simpler if everyone just got 20k tax advantaged retirement savings a year regardless of where they worked.

I'm all in favor of opt out retirement but this sounds messy and potentially high-fee. I guess I still favor it over doing nothing, but a traditional ira seems like a better choice.

FarmerPete

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #3 on: December 11, 2014, 08:30:03 AM »
I agree that it would be best to have 1 retirement account.  I consider myself a knowledgeable person, but some of the complications are crazy.  My work has a 457 plan, and I still don't quite understand how that works.  I know it's basically just a 401k that I can contribute an additional 17.5k to and I can get the contributions at any time, but I have no clue how company matching affects it.  We have no documentation that I can find.  Half my coworkers are in a pension and have no clue what it is.  Of the other half, most of them have no clue.  One thinks that if you give to a 457 the company matching goes in your 401k.  I'm just confused.  I've been doing 5% to my 401k.  I set my 457 at 5% now, but left my 401k at 5% until the new year.  At least that way if there is some mistake, I can fix it in 2015.  So confusing!

prof61820

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #4 on: December 11, 2014, 10:14:15 AM »
1.  0.75% fees are quite high

2.  The article also says "the money will be deducted ... just like taxes", which is misleading at best, since the Roth is post-tax money.


I think the intention is to populate the plan choices with Vanguard low fee type mutual funds, which, of course stirred up the financial services and insurance folks who want to sell their high fee and other products.  I think having 2.5 million new investors that are educated about fees is a good thing in the long run.  We will have to see what Illinois' new treasurer does.  He voted for it in the State Senate and co-authored a letter to the editor with the Bill's sponsor over the summer: http://www.rebootillinois.com/2014/07/02/uncategorized/biss-frerichs/bill-create-statewide-illinois-401k-plan/19775/

The money is deducted just like a payroll tax so I don't think this is misleading at all.  Many folks on here are converting to a Roth IRA now because they don't want to pay taxes on their retirement income and a Roth can be used for a mortgage down payment so I don't think Roth is a bad "starter" vehicle at all.

Maybe the Feds will figure out a way to combine the Secure Choice Program with MyRA? http://money.cnn.com/2014/01/29/retirement/myra-accounts/

If we don't take baby steps like these in the US, what is the alternative to ginning up the savings rate of the middle class?  It's also refreshing to hear politicians talking about ways to improve private sector retirement rather than focusing on how to save and to pay for public employee pensions.  Maybe some folks in Illinois realize that the vast majority of Americans do not have pensions and that the government needs to do something to promote retirement savings.

Here is some info on Australia's compulsory savings system: http://www.businessweek.com/articles/2013-05-30/in-australia-retirement-saving-done-right

Also, here's an interesting post on the politics of SB 2758: http://capitolfax.com/wp-mobile.php?p=23416&more=1

Capsu78

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #5 on: December 13, 2014, 12:11:59 PM »
I can guarantee it is a money grab.  This is Illinois we are talking about.  It's all they do.  (Full disclosure- I live here)

Sid888

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #6 on: December 16, 2014, 09:35:51 AM »
Seems like a nice little money grab by the corrupt politicians that will hire the future fund administrators. 

Potential fund administrators cannot make political contributions so this can't be used to raise money by politicians.

Which politicians in Illinois do you consider corrupt?

Sid888

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #7 on: December 16, 2014, 09:37:20 AM »
I can guarantee it is a money grab.  This is Illinois we are talking about.  It's all they do.  (Full disclosure- I live here)

How will they grab money?  Which politicians in Illinois will do it?  What are they doing now to "grab" money?

Forcus

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #8 on: December 16, 2014, 10:25:57 AM »
I can guarantee it is a money grab.  This is Illinois we are talking about.  It's all they do.  (Full disclosure- I live here)

How will they grab money?  Which politicians in Illinois will do it?  What are they doing now to "grab" money?

If you only knew. The IL government has looted funds for years, moving allocated funds to general funds to pay for pork barrel projects. They have underfunded or defrauded (depends on what news source you look at) the employee pension funds to the tune of 100 billion dollars. The Bright Start program which was supposed to allow parents to save money for their children's college education lost half the money that parents invested. Illinois couldn't manage a lemonade stand without "misplacing" most of the revenue.

I point my fingers at no particular culprit, from what I've read the problem has been ongoing for decades.

I'm not against a novel program like this in theory but I recall absolutely zero discussion on this and it was quietly passed through under our lame duck governor. That alone gives me serious pause, even without the history of IL not being able to handle its own finances. It's like asking your drunk uncle to hold on to your beer for you...

kendallf

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #9 on: December 16, 2014, 10:54:06 AM »
The program in outline looks great.  The devil will be in the details of who is hired to manage Secure Choice and the fund choices available.  Capping the expense fees seems like  a decent start.  As an aside, LOL.. I love the "Secure Choice" name, wonder if it'll be all bond funds?

Sid888

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #10 on: December 18, 2014, 03:13:55 PM »
The program in outline looks great.  The devil will be in the details of who is hired to manage Secure Choice and the fund choices available.  Capping the expense fees seems like  a decent start.  As an aside, LOL.. I love the "Secure Choice" name, wonder if it'll be all bond funds?

If they can get these investors into a MyRA product - with principal contributions guaranteed against loss - it certainly will be a "Secure Choice."

zinnie

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #11 on: December 18, 2014, 03:25:59 PM »
I love this idea and am very much in favor of "opt-out" policies for things we want to cultivate in society (like opt-out organ donation). Still gives people the freedom to do what they want, but dramatically increases participation.

zataks

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #12 on: December 18, 2014, 03:30:53 PM »
I agree that it would be best to have 1 retirement account.  I consider myself a knowledgeable person, but some of the complications are crazy.  My work has a 457 plan, and I still don't quite understand how that works.  I know it's basically just a 401k that I can contribute an additional 17.5k to and I can get the contributions at any time, but I have no clue how company matching affects it.  We have no documentation that I can find.  Half my coworkers are in a pension and have no clue what it is.  Of the other half, most of them have no clue.  One thinks that if you give to a 457 the company matching goes in your 401k.  I'm just confused.  I've been doing 5% to my 401k.  I set my 457 at 5% now, but left my 401k at 5% until the new year.  At least that way if there is some mistake, I can fix it in 2015.  So confusing!

A 457 is a deferred compensation plan, not a qualifying retirement account.  That is why you can (if offered both) achieve $35k of tax advantaged money for 2014.  The 401k is a qualifying retirement account so among all qualifying retirement accounts you can only place 17.5k annually (18k for 2015).  These may be 401k, 401a, 403, etc.  I'm not familiar with all of them

The 457 is cool because it's your money.  You can take it anytime with qualifying hardship or you can draw it when you terminate employment (or, ideally, when you are ready to retire) without penalty.  Although you do pay taxes on what you take.  But it's great to have especially if you're into early-retirement because of the lack of penalties of drawing before 59 years old like the qualifying retirement plans have. 

A defined benefit pension plan is what many state and federal employees have.  It is a retirement plan that identifies a specific benefit you will get upon retirement.  Often it is based on averaged wages and years of service.  Defined benefit plans are becoming less common but I think are what most people think of when they think 'pension'.
This is opposed to a defined contribution pension plan where a set (% or $) amount of money is placed into investments on your behalf and invested until retirement.  Your benefit is however much is in the plan when you retire and depends on how much was contributed, years of compounding, and returns.  Still better than no plan but not quite as cushy as the defined benefit plan.

Being as this is MMM, I'd encourage you to max out both plans as $36k annually is a huge reduction in tax liability and a quick move to retirement!

robotclown

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #13 on: December 18, 2014, 03:38:46 PM »
The cash grab is this: The funds will all be run by some privately-owned kickback company.  They'll set their fees at .75%, automate it to do whatever vanguard's fund does, and pocket the difference.

Sid888

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Re: New Illinois law enrolls 2.5 million workers in retirement plans
« Reply #14 on: December 18, 2014, 03:42:42 PM »
The cash grab is this: The funds will all be run by some privately-owned kickback company.  They'll set their fees at .75%, automate it to do whatever vanguard's fund does, and pocket the difference.

I think there will be multiple choices on funds - including Vanguard low fee funds.