Millions of workers struggle to save for retirement in part because it isn’t easy enough to open an account or to have the money automatically deducted from their paychecks. But they could soon find themselves with more options.
On Thursday, the Labor Department unveiled a rule that should make it easier for states to launch their own retirement plans for private-sector workers who don’t already have access to savings accounts through their jobs. The rules, which were requested last year by President Obama, provide a clearer road map for states who want to provide such plans but needed more federal guidance. The department also announced a proposed rule that would open the door for large cities to create their own plans.
“Too many Americans reach retirement age without enough savings to supplement their Social Security checks,” said Jeff Zients, director of the White House National Economic Council. “Today we are taking a major step toward ensuring that every American can save for retirement at work.”
With the new guidance, states that create their own plans will be able to automatically enroll workers into individual retirement accounts (IRAs). Workers will also be able to have their contributions automatically deducted from their paychecks, an option that is not usually available for people saving for retirement outside of a workplace plan. Employees typically gain access to these easy saving strategies when they have retirement plans at work, such as a 401(k) plan.
But because the retirement accounts are IRAs and not 401(k)s, savers would not have some of the other benefits that workers with a workplace plan might receive, such as matching contributions from their employers. People saving through IRAs can also set aside less money each year than those saving through 401(k)s. But the IRAs give the states a simpler way to fill the gap for workers who don’t have access to accounts while also keeping the burden low on the states and employers, retirement experts say.
“Really this is what this rule is aimed at — allowing states to create a backup plug and play option for [workers],” said Sarah Gill, a senior legislative representative for AARP.
When workers are left to their own devices to open their own retirement accounts, such as an IRA, few people do, according to research. For example, fewer than 10 percent of people without workplace plans were contributing to any retirement account, the Labor Department said. And the pool of employees without workplace plans is large: One-third of all workers do not have access to retirement accounts through their jobs, according to the department.
Eight states are working to launch their own retirement plans. Some states have hesitated to create their own plans out of concerns that their plans may be subject to federal regulations that may require more paperwork and higher administrative costs. The rules outlined Thursday explain that plans will not be subject to the Employee Retirement Income Security Act, which governs retirement plans and pensions, if they meet certain criteria. For example, states must be responsible for running the plans, not employers. And employers cannot make contributions to the IRAs. Also, workers need to be given the ability to opt out of the plans if they do not want to participate.
The latest move is part of a broader effort by the Obama administration to make the sometimes intimidating process of saving for retirement simpler and more seamless for the millions of Americans who are not stashing away enough money for their later years. Last year, the Treasury Department rolled out the myRA, an
account for people who don’t have access to plans through their jobs. Through the myRA, savings are backed by the U.S. government instead of being invested in the stock market. And the administration announced rules earlier this year targeting the conflicts of interest that sometimes taint the professional advice given to people saving for retirement. That rule could revamp the professional advice by requiring brokers and financial advisers to put their clients’ interests ahead of their own.
But the rule for state plans could face steep opposition from financial professionals and conservatives that worry the move may increase costs for states and taxpayers or compete with plans that are already available. Multiple lawsuits already have been filed challenging the rule on retirement advice and seeking to block the rule from going into effect. On Thursday, Labor Secretary Thomas Perez acknowledged that this rule could face similar legal challenges but added that states sticking to the guidelines should have a minimal chance of having their plans challenged in court.