Signed into law in January of 2015, the Illinois Secure Choice Retirement Savings Program is one of the frontrunners leading the charge in affording those working individuals who do not have access to a retirement savings plan through their employer a chance to automatically save through a state-run government program. The 2015 legislation began implementing its objectives by requiring all employers with 25+ employees with businesses older than 2 years old (and not already offering employer-sponsored retirement plans such as 401ks) to enroll their employees into the program or else pay a fine. The benefits to having a plan such as this in place are immense.
As of last June, studies determined that somewhere between 25-35% of Americans have no retirement savings at all. While this percentage includes citizens of various ages, similar litmus tests amongst those aged 60 and older found that less than 50% of them felt that they were on track to retire at Social Security’s designated Full Retirement Age (FRA). With the advent of a program such as Illinois’s Secure Choice program, the state can do its part in combatting this lack of retirement readiness through ease of access. Here’s how it would work: without so much as a signature, a registered employer will open up an account or link an existing account if an employee already established an account through a previous job. From there, the employer will begin an automatic deduction of 5% of the employee’s income to go towards this new Secure Choice retirement plan. Suddenly, with barely any required input on behalf of the employee, they’ve gotten a jump start on saving up for their retirement!
While it may start up in an easy-to-manage way, the Secure Choice retirement plan does offer customization available for the employee to fix up in whatever way they desire. Though the default payroll deduction amount is 5%, this number can be altered all the way down to 1% of wages or all the way up to 100% of eligible wages (after other payroll deductions are taken). Additionally, employees can elect to have their plan automatically increase this contribution percentage by 1% a year if they desire so they can save more as their wages increase over time. Additionally, to further this customization, your contributions can be invested into a few different funds depending on your risk tolerance. While the size of this investment universe may be smaller than that of a Charles Schwab or Fidelity, the options of mutual funds within provide broad based exposure to the market in either a target-date fund (aimed at decreasing equity exposure as one gets closer to retirement), or more blanketed growth, conservative, or capital preservation funds. As a result of these investment menus and the malleable contribution amounts, participants who desire a bit more of a hands-on approach to retirement savings have full control of their savings and investments.
There are some downsides in comparison to a traditional employer retirement plan. The Illinois Secure Choice program is actually set up as a Roth IRA, which forfeits some of the benefits seen with that of a traditional 401k plan. For one, the contribution limit is smaller, sitting at $6,000 in 2020 ($7,000 if you’re over 50), versus the $19,500 ($24,500 if 50+) of a 401k. A 401K or 403b can also provide an employer contribution on behalf of the employee, while the Secure Choice plan does not. Additionally, employee contributions can only be made up to a certain income threshold. If you make over $139,000 and are single or make over $206,000 as a married couple, you are not eligible per the IRS to make contributions to the Roth IRA through Secure Choice. In contrast, a 401K has no such income eligibility phase-out. And lastly, since the Secure Choice is set-up currently only as a Roth option, there are no current year tax opportunities to be had here either. The good news is that, as with all Roth accounts, the savings you may have down the road by using this tool will provide a TAX-EXEMPT BUCKET in which both earnings and eventual withdrawals will never be taxed again!
At the end of the day, Illinois’s Secure Choice retirement plan may not be the silver bullet solution to helping all Americans save enough for retirement, but with multiple other states adopting similar programs (California, Connecticut, Maryland, and 6 others), this could be the start needed for many individuals who find themselves without an employer plan to begin investing and working towards reaching their long-term financial goals.