As a federal mandate to require small employers to offer auto-IRA retirement programs got cut from what’s currently being considered in President Joe Biden’s social and climate spending bill, many states have already moved forward with their own state-run auto-enroll IRA programs.
Now a couple of Western neighbors have decided to band their proposed programs together.
Earlier this month, the Colorado Secure Savings Program and New Mexico Work and $ave signed a first-in-the-country Memorandum of Cooperation (MoC) to pursue a formalized partnership agreement for their auto-enroll IRA programs.
This partnership will be the first auto-enroll IRA multi-state program in the country. With the successes of the single-state Auto IRA savings programs in California, Illinois, and Oregon, the Colorado and New Mexico partnership, the two states say, represents the next step in extending low-cost, portable retirement savings options to private sector businesses and their workers.
“With this historic partnership, Colorado and New Mexico are working to ensure that a dignified and sustainable retirement isn’t only a dream for the privileged few. This is one step in the right direction for a truly portable retirement benefit—one that carries across state lines,” Colorado State Treasurer Dave Young said in a statement.
The MoC highlights areas of collaboration including shared program administration and financial services, marketing and outreach support, program evaluation and research, as well as data collection and participant privacy.
The states say participants will benefit from lower fees achieved through creating economies of scale, as well as a truly portable benefit that follows workers across jobs and state lines. Additionally, the partnership is anticipated to provide benefits to Colorado and New Mexico by shortening the timeline to program self-sufficiency.
“This partnership allows us to get more value out of the program we are already working to establish, and will benefit participants in the future by allowing us to reduce fees sooner, once the program’s implementation begins in October 2022,” said Hunter Railey, director of Colorado Secure Savings Program. “The partnership is open to working with other states as well.”
Colorado’s new Secure Savings Program and New Mexico’s Work and $ave IRA Program are retirement savings plans for private sector workers who currently do not have access to workplace retirement savings plans. The states say the partnership will offer an accessible retirement savings option to almost one million Coloradans and their families, more than 40% of the state’s workforce, and nearly 430,000 New Mexicans who do not currently have access to a retirement savings account or plan at work.
In a Nov. 18 Op-Ed in The Denver Post, Young said the new program is a “win” for employees, employers and taxpayers. “It provides a pathway to economic security in retirement, allows employers to offer a competitive benefit at no cost with minimal administrative burden, and saves taxpayers money. In Colorado, those tax savings add up to as much as $18 billion over the next 15 years,” Young said.
“The program will be administered at no cost to employers, with no employer fees or fiduciary liability. The administrative burden will be minimal, with no employer matching contributions, and it will be compatible with payroll systems.”
Colorado Treasurer Dave Young
“The program will be administered at no cost to employers, with no employer fees or fiduciary liability. The administrative burden will be minimal, with no employer matching contributions, and it will be compatible with payroll systems,” the op-ed continued. “This allows small and medium businesses to be competitive with a full benefits compensation package,” and added that employers will have the option of sponsoring their own plans or enrolling in the state program.
Instead of being tied to the employer like in a traditional retirement plan, the partnership auto-IRA program will be tied to and travel with the employee if they move to a different job. Research indicates that many workers residing near the border between Colorado and New Mexico work in both states. Those participants will be able to carry their automatic retirement savings across state lines, helping to maintain an enduring and truly portable retirement program.
“This retirement savings partnership between Colorado and New Mexico exemplifies the best in forward thinking and collaboration,” said New Mexico State Treasurer Tim Eichenberg. “Together Colorado and New Mexico can forge a pathway by working with private sector employers and workers to build retirement savings security for those who might otherwise be left behind.”
Minus federal mandate, states take lead
Speaking of getting left behind, proposals to expand retirement plan coverage were late omissions from President Joe Biden’s $1.85 trillion social policy and climate spending package still being hammered out in the House.
Had proposals to include key provisions from the Automatic IRA Act and the Encouraging Americans to Save Act remained in the bill, states would have been required to provide an auto-IRA option. The American Retirement Association was among the key supporters of the measure, and ARA CEO Brian Graff said the organization was “definitely disappointed that the coverage expansion provisions were not included” in the spending bill.
“Estimates show that enactment of the combination of the Automatic IRA Act and the Encouraging Americans to Save Act would create 51 million new individuals now saving for retirement and would add an additional $6.2 trillion in retirement savings over a 10-year period,” Graff testified during a September Senate Finance Committee hearing. “Nearly all—98%—of these 51 million new savers earn less than $100,000 per year.”
Graff has said the data is “absolutely, positively clear” that this will work.
“We’re trying to employ, basically the success of how 401ks in the private workplace have succeeded and apply it much more universally,” Graff said during the hearing.
The automatic IRA proposal was backed by House Ways and Means Committee Chair Richard Neal (D-MA), who has supported the automatic IRA idea for years. But it was opposed by the top Republican on the committee, Rep. Kevin Brady (R-TX), who feared auto-IRA provision would impose an “onerous new mandate” for businesses, and criticized Democrats in September for taking a partisan approach to retirement-savings legislation, since lawmakers on the committee have previously worked on bipartisan bills on the topic.
Specifically, the auto-IRA proposal would have required employers that have been in existence for at least two years, do not sponsor a retirement plan, and employ five or more people to automatically enroll those employees in IRAs or 401k-type plans. To offset administrative costs, employers would receive a tax credit.
The provision would have required employers to deduct at least 6% from employee paychecks starting in 2023 and automatically increase that savings rate by 1% per year until reaching 10%. Companies with five or fewer employees and those which have been in business for less than two years would be exempt from the requirement.
While the coverage expansion provisions were ultimately dropped from the spending bill, there’s a strong chance they will resurface as part of the bipartisan SECURE Act 2.0 legislation expected to be reintroduced in 2022 (assuming it doesn’t get passed in 2021).
“The good news is that because we’ve gone through this process, we’ve educated a lot of policymakers about No. 1 that there’s a coverage challenge that’s significant in this country and No. 2, that we have a way to solve it that works. So, this is by no means the end of the story,” Graff recently told 401k Specialist.
In the meantime, states continue to address the issue on their own. Since 2017, nearly three-quarters of the 50 states have either proposed or enacted legislation for a state-sponsored retirement program.
According to Paychex, eight states have an active plan, including mandatory ones in Oregon, California, Illinois and New York. Vermont, Washington, Massachusetts and New Mexico have active programs that are voluntary. Three others states—Connecticut, Maryland and New Jersey—were scheduled to start their mandatory programs in 2021, while Colorado, Maine and Virginia have passed legislation for mandatory programs.
The following states have introduced legislation for mandatory programs: Hawaii, Indiana, Idaho, Kansas, Maine, Massachusetts (their current voluntary program is only for non-profit organizations), Minnesota, Missouri, Nevada, North Carolina, Oklahoma, Rhode Island and Texas.
SEE ALSO:
• ARA’s Graff Projects 51 Million New Retirement Savers if Two Bills Get Passed
• ARA’s Brian Graff on Retirement Plan Provisions: ‘This Story is Not Over’