which was passed by the legislature last week, looks, on balance, to be a good program.
Under the measure, sponsored by Sen. Daniel Biss, D-Evanston, and House Majority Leader Barbara Flynn Currie, D-Chicago, small companies with at least 25 employees will have to offer IRA access at the workplace if they don’t offer a 401(k)-type plan. In a critical move to end the procrastination that keeps people from saving, employers will be required to automatically take 3 percent of each employee’s pay out of paychecks upfront. And that 3 percent will go into an IRA for each person.
Although employees will be able to opt-out, research shows that automatic enrollment is a very effective means of increasing retirement savings. Also, the funds will be automatically directed into a “target date” or “lifecycle” fund, in which asset allocation is determined by one’s age and progressively moves from more aggressive to more conservative investments.
Crain’s gives more detail on the nature of the IRA. It’s not a matter of each employer choosing an IRA; instead,
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.
Is this the right approach? On the one hand, the Bright Start program has had issues in Illinois, and, given Illinois’ history of corruption, one worries that there is the potential for corruption here, too — be it selection of directors for political reasons rather than governance and investment expertise, heavy-handed pressure by the state government for the managing firm to invest in politically-favored investments (at the extreme, buying state bonds at below-market interest rates), or kickback demands — which, if this program is successful, could mean large sums of money to be misused. On the other hand, any employer who wishes to avoid this program can just provide an alternate retirement plan. (Though the question I now have, and don’t have time to answer this morning, is: how easy or difficult is it for small employers to offer a retirement savings program? Are there too many regulatory burdens in their way?) And, in any case, if nothing else is on offer, this program is a lot better than nothing.
One wishes, though, that Illinois would leave the pioneering to other states (they’re the first ones to enact something like this) as long as the state still has the task in front of itself of just simply getting its fiscal house in order.
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