The need for people to save more for their retirement is well-known. While nearly all those employed by government entities get a pension, only a third of workers in the private sector do. The rest must save in a tax-deferred retirement plan such as a 401(k) sponsored by their employer (possibly with a limited match to their savings) or a personal IRA account.
Not enough do so, which is why elected officials want to create the New Jersey Secure Choice Savings Program to strongly encourage more savings. Unfortunately, the proposal that recently passed the Legislature and is on Gov. Phil Murphy’s desk would turn retirement savings — already available to workers at all income levels — into a government program and includes an apparent deal breaker at the heart of it.
Secure Choice Savings would require the participation of every company in the state with 25 or more employees that doesn’t currently offer retirement savings — a relatively small new burden on businesses, but on top of too many from the state. They would have to enroll each employee in a state-managed retirement fund and start putting 3 percent of their earnings into it unless an employee objects.
The program would insert the state between employees and the competitive retirement savings market. Anyone already can open their own IRA retirement savings account, choosing whatever investments they think best.
Under Secure Choice Savings, the governor and leaders of the Legislature would appoint a state board, which would hire an outside investment firm and together they would select a handful of investment options to receive the savings of perhaps more than a million workers in New Jersey.
There’s no reason to believe officials would do better with private workers’ savings than their dubious record managing public-employee funds. Secure Choice should give participants access to regular IRA options and not just a short list of state-sanctioned investments.
The program’s main advantage is that it would automatically enroll workers in retirement savings payroll deductions and let them opt out if they wish. Studies have shown people are more likely to save if that is the default, rather than having to choose to save.
But that also probably makes the state and its taxpayers and perhaps even employers responsible under federal law for the retirement benefits to workers.
As the N.J. Business & Industry Association has pointed out, retirement plans are subject to the federal Employee Retirement Income Security Act, or ERISA, unless they meet a few important conditions. One is that employee participation be completely voluntary.
NJBIA says courts have held that opt-out arrangements are not consistent with being completely voluntary. In response, the U.S. Department of Labor in 2016 adopted a safe harbor from ERISA oversight for such secure choice plans, but Congress repealed that exemption the following year. As the matter stands, it looks like New Jersey and maybe employers as well could be responsible if, for example, state mismanagement costs workers some of their retirement benefits.
No question a default retirement savings program would increase participation that is needed, and the ability to opt out still would give workers the liberty to make other arrangements.
But a clearer exemption from liability is needed before the state provides that program, and when that’s available default participation should apply to existing employer-provided retirement savings as well. More people with access to those plans need to save more too.