The increasing enthusiasm that states have been showing for setting up their own private-employer retirement plans is creating “a delightful mess,” in the words of Dorsey & Whitney lawyer Bob Seng.
By delightful, he meant it’s great that policymakers at last seem determined to help the tens of millions of private-sector American workers with little or no money for retirement aside from their Social Security.
As for mess, well, that’s self-explanatory. Just because the states want to help doesn’t mean they know how to create an effective employee benefit plan. It also looks like it might not be that long before the country has 50 different versions of them.
If employers haven’t been paying attention to what states are now up to, Seng added, it’s time they start.
At least half of the states have been working on some sort of plan, as tracked by the Pension Rights Center, an advocacy organization for workers based in Washington. Generally, workers’ contributions get deducted from their paychecks, like in a 401(k) plan, only the money goes into a government-sponsored plan.
Minnesota is looking at the idea. The Minnesota Management & Budget agency, the state’s finance arm, owes the Legislature its conclusion on the feasibility of a state retirement plan for private-sector workers. The report is expected by March, according to an MMB spokeswoman, and may be released sooner.
One of the things that held back development of state plans until now is a federal law known as ERISA (the Employee Retirement Income Security Act), which goes back to the 1970s when some big employers went under and took their workers’ pension money down with them.
In this law, Congress explicitly made it the employer’s burden to make sure that the retirement benefits of its workers were protected. Now, when employers get sued over their employee benefits plans, which happens all the time, it’s likely for a claim under ERISA.
The U.S. Department of Labor just issued new guidelines hoping to make it far more attractive for employers to enroll their employees in a plan run by a state, getting them at least partly off the hook legally if they do so.
“We are pretty enthusiastic about the Department of Labor’s guidance,” said Karen Friedman, executive vice president and policy director for the Pension Rights Center. “They gave a thumbs-up to these automatic IRA plans, so long as the state set them up and employers have very little to do other than just ensuring that money gets automatically deposited into the states’ plan.”
The state furthest along seems to be Illinois, which has adopted a system for individual retirement accounts that will be funded by a payroll deduction.
Called the Secure Choice Savings Program, it’s built around a straightforward employer mandate. Private employers in business at least two years and with 25 or more employees have to put their employees in the savings program unless they have another retirement savings option.
The champion of this idea was an Illinois state senator who had been schooling himself on possible fixes to a hopelessly broken public pension system in his state. He then learned about just how many private company employees are even worse off, with up to six in 10 low-wage private-sector workers in Illinois lacking access to a retirement plan at all.
Perhaps it’s admirable to try to fill some of the retirement funding gap for these workers, but of course retirement finance is not the sort of problem that’s unique to Illinois. About four in 10 private-sector workers in Minnesota have no access to a retirement plan, according to MMB, and nationally the figure is about half.
And as Friedman pointed out, no matter how many tax breaks or tax credits we throw at employers and employees, it’s clear that if saving for retirement doesn’t happen more or less automatically at work, it’s not likely to happen at all.
To Seng, the assistant general counsel for pay and benefits for Minneapolis-based Target before rejoining Minneapolis-based Dorsey last year, what states have been doing to try to fix the problem looks a lot like what happened 10 or more years ago, with the problem then being far too many people without any health insurance.
States like Massachusetts saw no health insurance reform initiatives coming out of Congress, so they forged ahead with plans of their own.
The federal government did finally get moving, of course, with passage of the Affordable Care Act. No matter what businesses think of a health care law that created an employer mandate, Seng said, at least it’s a federal law and multistate employers have one set of compliance problems, not 10 or even 50 of them.
To the problem of people aging out of the workforce with no retirement funding to fall back on, he said, “what we need is a federal solution, not a lot of mucking around at the state level. My God, who would want to put the state of Illinois in charge of retirement policy?”
It is certainly true that Illinois is a strong contender for national leader in government dysfunction. Last week, Illinois’ governor delivered a State of the State address seven months after his state was supposed to have adopted a budget. Meanwhile, the latest reported size of the hole in Illinois’ public employee pension plans is around $110 billion.
Last fall, Seng saw the Illinois state treasurer present the new private-employer plan to a meeting of the American Benefits Council, a trade organization. One of the first questions came from an employer with operations all over the country.
It’s common to have a waiting period for new hires before they can enroll in a 401(k) program, maybe six months. Does a company with operations in Illinois have to put a new employee into Illinois’ plan for those few months?
Seng described this public official as an otherwise impressive figure, but it was clearly the first he’d ever heard that new hires may have to wait a bit before getting into a regular 401(k) plan.
“If we have a bunch of those Illinois-type plans, for a good Minnesota company like Target operating in a bunch of states, they are going to have to track all of these … to see if they have some obligation,” Seng said. “It’s going to be a disaster.”