Janico, a janitorial services company in North Highland, Calif., always offered a comprehensive benefits package, including health insurance, vacation days and holiday pay — but it could never include a retirement plan.
There were too many compliance and legal issues, and administering the plans was expensive, said Lorenzo Harris, Janico’s president.
But then California introduced CalSavers, the state-run auto-IRA program, and Harris was one of the first members to participate in the pilot phase. CalSavers requires employers with five or more employees to offer their own retirement plans or register for CalSavers.
Workers could choose to opt out of the program, or contribute to this retirement plan in the same way 401(k) plans are funded (where contributions are made through payroll). Now, enrolling employees in a retirement plan takes only 20 minutes, he said. “It provides [employees] with a benefit they otherwise would not have had,” he said.
Small businesses across the country could use this type of program. Three-quarters of business owners who do not offer a retirement plan said they are not likely to implement one in the next two years, under current circumstances, but half said they would start their own plans if the state implemented an auto-IRA system, according to a Pew Charitable Trusts survey. Another 13% said they would drop their current plans and enroll in the state program.
A recent court decision may have paved the way
More states may very well move to administer their own plans after a recent court decision found state-sponsored plans constitutional.
The question of legality over these plans has been back and forth for years. The Obama administration said these plans were legal, and not pre-empted by ERISA, but that decision was reversed in Congress, which concerned states considering a similar program, said Elizabeth Kelly, senior vice president of operations at United Income, and a former special counselor for economic policy in the Obama administration. The new court decision should encourage more states to move forward, she said.
Earlier this month, the U.S. District Court for the Eastern District of California ruled it is legal for California to sponsor its own retirement program. The Howard Jarvis Taxpayers Association and other nongovernmental employees sued the program, saying it did not adhere to Employee Retirement Income Security Act of 1974 (ERISA), the federal law that sets standards for private workforce retirement plans. The court ruled the plan does not pre-empt the law, partly because states are administering the programs, not the employers.
A handful of states have already implemented programs, including Oregon, Illinois and California. New Jersey’s governor just signed a bill for its own. Many others — at least 20 states and cities — have introduced legislation this year to create their own programs, which is more than last year, said Angela Antonelli, a research professor and executive director of the Center for Retirement Initiatives at Georgetown University.
Almost all states, with the exception of seven, have considered creating such a program in the last five years. “In setting up these auto-IRAs, [the states] felt they were on strong legal ground,” she said. “The courts have now agreed.”
Why states are stepping in
Americans are at risk of running out of money in retirement, or having barely any to start with. Not all employees are offered workplace retirement plans, and even when they do, not all use them or save enough in them (perhaps because they don’t know they should, or because they simply can’t afford to do so at the moment). Workers, especially those who are self-employed, may not take the initiative to create their own IRA or similar accounts that allow them to invest for their retirement in a tax advantaged manner.
Small businesses may also not have the ability to implement their own 401(k) or similar retirement plans for employees, which can be expensive. Offering a low-cost option could come with higher fees to the employee, as well, some business owners argued.
Some 58 million full- and part-time workers — about half of the private sector workforce — are not participating in a workplace retirement plan, according to the Pension Rights Center. Many companies are moving away from pensions, instead incorporating defined-contribution plans, which places the onus on the employee to save enough for retirement. Those who don’t have enough saved might rely on Social Security in the future, a program that is at risk of insolvency in the next 15 years if Congress doesn’t act. If that happens, retirees will still get a benefit check, but about 79% of what they are owed.
Many employers and their workers are taking advantage of these state-run programs, and in certain cases are increasing their own contribution rates from 5% to eventually 10% or 15%, said Lisa Massena, vice president of government savings at Ascensus, the firm that manages a few state-run programs, including Oregon and Illinois. Through OregonSaves, the first state program which started as a pilot in 2017, workers have saved more than $16 million for retirement. Of the almost 126,000 employees in the system, more than 74,000 (or 72%) of employees are enrolled with an average 5% or more savings rate.
Weighing the pros and cons
States offering, and in some cases, mandating employers to offer automatic-IRAs is a start, but some critics say it is the wrong one. Some critics say there are already alternatives for small businesses, ones that are not as expensive as a 401(k) plan, while others say governments are not as fluent in sponsoring retirement plans as financial services firms.
Individual retirement accounts also have lower contribution limits — $6,000 for workers under 50 (and an additional $1,000 for those 50 and older), compared with the $19,000 limit for 401(k) plans (or $25,000 if you’re 50 or older).
States are safe for now, but there’s always the possibility of other lawsuits, especially as states create their own plans. Still, California’s court decision — as well as the confidence in California, Oregon, Illinois and New Jersey, as well as the others to already get started — will inspire other states to seriously consider moving forward with their plans, Antonelli said. “With that issue being settled to some extent, right now the question is what impact it will have,” she said.