U.S. Secretary of Labor Thomas Perez will laud Illinois on Monday for being the first state in the country to make retirement saving easier for people working for small companies and will lay out rules aimed at helping other states follow without fear of being sued.
About half of U.S. states are now considering plans that will enable small businesses to start letting people save for retirement at work without a lot of paperwork or responsibility. Such plans are considered crucial in getting 68 million of the nation’s workers to save because they do not now have access to a retirement savings plan, such as a 401(k), at work. Without easy access on the job, few people take the initiative to save on their own.
While states, including Illinois, have been working on the initial stages of workplace individual retirement savings plans, or workplace IRAs, they have been reluctant to forge ahead, Perez said. They’ve been concerned about being sued under the federal Employee Retirement Income Security Act, which puts the U.S. Department of Labor in charge of regulating retirement plans.
Perez will be announcing in Illinois on Monday guidelines that will reduce liability concerns for both states and employers and give states authority to proceed. Yet, at this stage, the rules are proposed and are not likely to be final until 2016.
The Department of Labor, Perez said, is eager to see states initiate retirement savings plans that can be used by small companies because there is a huge void in the country.
“Too many people are on the pathway to poverty because they will be solely reliant on Social Security,” Perez said.
While large companies often offer 401(k) plans, about half of workers in the private sector work for small businesses, according to the U.S. Small Business Administration. And small companies are often reluctant to take on paperwork or the risk of litigation that comes if employees think they have been offered expensive plans or deficient investments.
“We cannot guarantee anyone that they won’t get sued,” Perez said. But the proposed rules that will be announced Monday “can mitigate the risk.”
Illinois is one of several states that asked the Labor Department for relief under ERISA so that it could proceed with its retirement savings plan. The Obama administration has encouraged states to take the initiative with so-called automatic IRAs, since legislation requiring small business savings plans has not been passed in Congress.
The Illinois Secure Choice Savings Program was passed by the state legislature late in 2014. Illinois Treasurer Michael Frerichs’ office is developing the program. He said it should be available in workplaces in 2017.
Under Secure Choice, small companies with at least 25 employees will be required to enroll employees in IRAs if they are not already offering 401(k)s or other retirement savings plans. Employers will remove 3 percent of employees’ pay on each payday and route the money into a state-operated IRA plan with mutual fund choices. Employees will have the right to increase or decrease the contribution, or skip the plan entirely.
Other states working on similar plans are California, Oregon and Washington.
The Illinois plan would relieve employers’ concerns because the state, not the employer, would be providing the plan, Frerichs said.
“Their only obligation will be to sign people up and pass through the money in a timely manner, as they do with taxes,” he said. “ERISA has been the major hurdle in our way” and the Department of Labor is settling that, he said.
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