By: Mark Glennon*
“Illinois Secure Choice Retirement Plan Succeeds in Fighting Nationwide Retirement Crisis.”
That’s the headline on Illinois Treaurer Micheal Frerichs’ press release last week marking the first anniversary of the program. Frerichs followed up with a news conference, and many stories around the state reported the story as he told it.
But look at his own numbers in context. They show that the program is failing.
First, a little background. Secure Choice is a simple retirement savings option intended for workers in smaller businesses that often don’t have employee retirement programs. It’s really just a Roth IRA, a common program available nationally under which contributions are not deductible but earnings on the account are tax-free. Contribution limits for Secure Choice are generally $6,000 per year if you are under 50, like a Roth IRA.
The law creating Secure Choice passed in 2014 with bipartisan support. It requires employers in business for at least two years and with at least 25 employees to offer a retirement savings plan or participate in Secure Choice. Workers may opt out, but the default option when starting is inclusion in the program. It was rolled out over the last 12 months and is administered by the Illinois treasurer’s office.
Results? Thirty-three thousand new workers set aside $8.5 million in retirement savings during its first year of operation, Frerichs boasted.
Sorry, Treasurer Frerichs, that’s a pittance.
Consider Frerichs’ numbers in proportion to the number of workers in Illinois and how much they earn. Let’s look just at those reporting $100,000 or less in income, since higher earners less often face a retirement problem.** Over 4.6 million tax returns per year are filed annually in Illinois showing $100,000 or less in adjusted gross income, so only about seven-tenths of one percent are in Secure Choice. Their average contribution for the year was only $260.
And they reported total adjusted gross income over $290 billion. That means only about three-thousandths of one percent of their income went into Secure Choice!
That’s failure, not success.
Why so low?
In fairness, employers were transitioned into the program gradually over the last twelve months, as explained in Frerichs’ press release. Better numbers therefore probably can be expected next year. And perhaps enrollment in Secured Choice is hampered by fears about the state’s financial condition. That shouldn’t be a concern because Secure Choice assets are legally segregated.
But there are other defects undoubtedly handicapping the program, particularly its fees, and those problems will persist.
Secure Choice charges an annual fee of $0.75 for every $100 in the account, which is unheard of in the industry for Roth IRAs. It may not sound like much, but it is, thanks to the power of compounding. If you put $500 per month into the account for thirty years, it would reduce your pot at the end by over $60,000.
You could avoid that fee entirely by opening a plain vanilla Roth IRA with exactly the same benefits at just about any broker.
You’d also get a much broader range of investment options. Secure Choice offers just three index funds, plus various targeted date retirement plans like brokers also offer. The $0.75 fee that’s the problem for Secure Choice isn’t about management fees on those underlying investments. Those seem consistent with the investment brokers offer, though I haven’t scrutinized them.
When the legislation for Secure Choice was pending, the concept didn’t bother me. Most Americans are indeed saving too little for retirement. Though I didn’t like sticking employers with another administrative burden, an optional, simple, cheap program seemed like a reasonable step.
What I forgot was what we too often forget. A nice idea is one thing, but execution is another. Especially with government. Especially in Illinois. With Secure Choice, Illinois botched it again.
*Mark Glennon is founder of Wirepoints.
**Numbers on tax returns and AGI based on stratification data were obtained by Wirepoints through Freedom of Information Act request to the Illinois Department of Revenue.