Employers: Are you ready for the November 2019 deadline?
Overview of the Illinois Secure Choice Savings Program
The Illinois Secure Choice Savings Program Act became effective on June 1, 2015, and mandated that a state-sponsored retirement savings plan be implemented within 24 months. We are quickly approaching that deadline in 2017. The Illinois State Treasurer, Michael W. Frerichs, has estimated that 1.2 million workers in Illinois could benefit from Illinois Secure Choice.
In January 2017, a financial feasibility analysis from the Center of Retirement Research at Boston College presented to the Illinois Secure Choice Board showed that the plan aimed to cover the average full-time uncovered worker making $38,000 per year.
Illinois Secure Choice went through several updates in 2018 and 2019:
- The Board updated the figure of potential workers enrolling in the program from 1.2 million to roughly 2.5 million,
- The program’s launch date was delayed until November 1, 2018, and
- The plan’s annual fees dropped to approximately 0.75% per account balance.
This state-sponsored retirement plan isn’t a pension plan and has no connections to the State Employees’ Retirement System of Illinois.
How Illinois Secure Choice works
Employers in Illinois who meet all of the following 3 criteria…
- 25 or more full-time and part-time employees,
- At least two years of operations, and
- No qualified savings plans, such as a 401(k), SEP-IRA, or Simple IRA.
…will have to start automatically enrolling their employees in Illinois Secure Choice as soon as registration opens (more on the deadlines for this program below). While independent contractors or freelancers receiving 1099-MISC forms from an Illinois employer aren’t considered for the 25-employee requirement, all part-time and seasonal workers count towards the 25-employee requirement.
Unless an employee were to opt out within the grace period (30 days), an Illinois employer would automatically enroll that employee in Illinois Secure Choice, start deducting a default 5% of every paycheck, and contribute that amount to a Roth IRA under the employee’s name. Once enrolled, employees can increase or decrease their withholding as a percentage or dollar amount.
In 2019, here’s how much you can contribute to a Roth IRA:
|Tax Filing Status||Modified Adjusted Gross Income||Contribution Limit|
|Single, head of household, or married filing separately and you don’t live with your spouse at any time during 2019||Under $122,000||Up to $6,000|
|$122,000 – $137,000||A reduced amount*|
|$137,000 and over||Zero|
|Married filing separately and you live with your spouse at any time during 2019||Up to $10,000||A reduced amount *|
|$10,000 and over||Zero|
|Married filing jointly or qualifying widow(er)||Under $193,000||Up to $6,000|
|$193,000 – $203,000||A reduced amount *|
|Up to $203,000||Zero|
Retirement savers age 50 and over are eligible to make a $1,000 in catchup contributions to a Roth IRA in 2019.
By default, all employee contributions will be deposited in an age-based target-date fund designed to end in the year closest to when the participant turns 65 (or plans to retire). To minimize investment fees, the Illinois Secure Choice Board chooses funds that are passively managed. Additionally, the Board offers these other funds, too:
- A capital preservation fund: This option seeks to preserve a participant’s capital by investing in money market U.S. securities
- A conservative fund: An index fund that tracks the total return of the U.S. investment-grade bond market
- A growth fund: An index fund that tracks the S&P 500
Given the focus on passively managed funds, Illinois Secure Choice is able to offer low annual expense fees compared to other current state-sponsored retirement plans. The plan’s annual expense ratio is approximately 0.75%. This means that the average full-time uncovered worker eligible for Illinois Secure Choice making $38,000 and contributing the default 5% to his Roth IRA would contribute $1,900 and pay $14.25 in investment fees per year. The fund charges no fees for making withdrawals, changing contribution percentages, or moving monies between investment funds. However, individuals making withdrawals before age 59 1/2 are subject to applicable penalties, such as the 10% early distribution penalty from the IRS.
Is Illinois Secure Choice legally mandatory?
Yes, employers who don’t comply with the Illinois Secure Choice Savings Program Act may be subject to fines and penalties as described in the act (820 ILCS 80/85):
- $250 for each employee for the full or portion of the first calendar year in which the employee isn’t enrolled or didn’t opt out of the plan
- $500 for each employee for the full or portion of the second calendar year in which the employee isn’t enrolled or didn’t opt out of the plan
Given that the minimum number of employees for this plan is 25, a non-complying employer would pay at least $6,250 in penalty fees for 25 employees in the first year.
However, the Illinois Secure Choice Act assigns no fiduciary risk to employers, doesn’t consider employers to be plan managers, doesn’t force employers to match any funds or guarantee any investment performance, and doesn’t make employers subject to the same administrative requirements as with employer-sponsored retirement plans. This lack of regulation could result in penalties for the company down the road.
Illinois Rollout Registration Date Deadlines in 2019 for Employers
As of September 2019, registration was open for all eligible employers with at least 25 employees who want to use the Illinois Secure Choice program (Note: Employers also have the option of offering another employer-sponsored retirement plan):
- 500+ employees: Register by November 2018
- 100-499 employees: Register by July 2019
- 25-99 employees: Register by November 2019
Those employers with fewer than 25 employees may participate in the plan, but do not have an enrollment deadline.
Eligibility of employees: Which employees qualify?
Since Illinois Secure Choice is a Roth IRA, you can only enroll in the plan if you meet the following income thresholds in 2019:
|Tax Filing Status||Modified Adjusted Gross Income|
|Single, head of household, or married filing separately and you don’t live with your spouse at any time during 2017||Up to $137,000|
|Married filing separately and you live with your spouse at any time during 2017||Up to $10,000|
|Married filing jointly or qualifying widow(er)||Up to $203,000|
To include those Illinois workers who become ineligible due to income, the Board is discussing the option to offer a traditional IRA in the future. Also, the Board is considering the option to include 1099-MISC workers in the future.
What happens if your company already offers a 401(k)?
If your company already offers a 401(k) or other plans qualified under sections 401(a), 403(a), 403(b), 408(k), 408(p), or 457(b) of the Internal Revenue Code, then you don’t need enroll your employees in Illinois Secure Choice. Your employees are automatically enrolled in Illinois Secure Choice unless they opt out within 30 days from the date that Illinois Secure Choice notifies them about the program.
Employees can opt out from Illinois Secure Choice by:
- Going to saver.ilsecurechoice.com and clicking “Set up your account.” If you choose to opt out and have received notification within the past 30 days, you won’t need to set up a username and password. Beyond 30 days, you will need to set a username and password to complete your opt out.
- Contacting client services by emailing [email protected] or by phone (855) 650 6913 Monday through Friday between 8am and 8pm CST to complete your opt out.
The financial downsides of Illinois Secure Choice
The objective of facilitating that 2.5 million Illinoisans save for retirement is very positive. However, Illinois Secure Choice has four major weaknesses.
The 0.75% annual expense ratio could increase
According to the feasibility study from Boston College, with a 0.75% investment fee, the plan would become cash-flow positive within 10 years. The finding of the study indicates that the Board would need to increase the default 3% contribution or increase the 0.75% investment fee to accelerate the plan’s break-even point. To avoid increasing the annual fee, the Board chose to increase the default contribution rate to 5%. Still, paying a 0.75% annual expenses ratio for your retirement account is high.
IRAs aren’t effective for high-income retirement savers and those close to retirement ageAs presented above, a single tax filer making $122,000 and up and joint married tax filers making $193,000 and up can make reduced contributions to a Roth IRA. Even when able to contribute more, Roth IRA holders can only contribute up to $6,000 ($7,000 if age 50 and over) per year in 2019. These contribution limits apply to traditional IRA holders, too.
Even though legislators are discussing the possibility of offering a traditional IRA for high-income earners, the latter wouldn’t be to take full advantage of their pre-tax deductions.
High-earning individuals and those close to retirement age are much better served by a 401(k), which allows them to contribute more than they can in an IRA. In 2019, that would be $13,000 more for high-earners and $18,000 for those age 50 or older, helping them significantly reduce their taxable income.
Lack of employer match
While the lack of an employer match might sound attractive for employers, the reality is that employers are generally better off by providing a match to employer contributions. In 2018, Vanguard reported that 95% of its 401(k) plans provided employer contributions, up from 91% in 2013. Providing a match to employee contributions allows an employer to fully deduct those contributions. If an employer were to offer a total of $1,500 in matching contributions to an employee’s 401(k) per year, the employer would be able to fully deduct the $1,500 from taxable income. Additionally, the employee gets preferential tax treatment for those contributions and is able to let those contributions grow tax-free until withdrawal in retirement.
On the other hand, lower-income workers also may feel better served by an employer-sponsored 401(k) with an employer match than a Roth IRA. The Boston College study raised the concern that increasing the default contribution rate of the plan could pinch the budgets of lower-wage workers. With many employers offering retirement plans with a full employer match with as little as a 6% employee contribution, low-income earners may feel that a 401(k) with an employer match provides a better bang for their contribution dollars. This is one of the reasons why Illinois Secure Choice plan holders would be able to withdraw their funds without penalty.
Target-date funds are underperforming
While the Board provides additional investment options, age-based target-date funds are the default option. An analysis of more than 1,700 target-date funds revealed that these types of funds have returns so variable that they haven’t covered investment fees on several occasions. In 2014, the U.S. Government Accountability Office raised this same concern in the event of a forced-transfer from a 401(k) with a low balance to an IRA.
Here is a full review of target-date funds, which help you determine whether or not they would be a suitable investment for you.
The bottom line: Research all of your retirement saving options
If you’re an employee uncovered by a retirement plan in Illinois, you’ll have to take action with the upcoming rollout of Illinois Secure Choice in 2019. Keep on top of the latest developments of this state-sponsored plan by reviewing the materials from past and upcoming meetings from the Illinois Secure Choice Board.
Take the time to investigate all of your available options, including a 401(k) with Human Interest. We can offer you a flat fee of 0.50% of your account balance, covering fiduciary, custodial, and advisory fees, access to over 30,000 funds with annual expense ratios starting at 0.05%, and a higher annual contribution limit.
Need help reviewing your retirement saving options? Check out these useful resources: