States' Retirement Plans
By Alice P. Jacobsohn, Esq.
How will people survive without personal savings? This is the question more and more states are asking as they look at the burden future state budgets are bearing from residents who failed to save for retirement. For the American Payroll Association's (APA) Government Relations Task Force (GRTF) Subcommittee on Retirement Accounts, the question becomes, what role should payroll professionals and their employers play in implementing state retirement plans?
APA Seeks Consistency, Minimal Employer Burden
Payroll professionals are not encouraging or discouraging, nor is the APA endorsing, any particular state approach to state retirement plan administration. Instead, the APA is seeking consistency in definitions, promoting electronic systems for communication, and, in general, recommending minimal burden on employers. For example, state plans that are managed through an electronic system would be more efficient for accessing retirement plan information, completing enrollment and opt-out forms, and providing employers with notices of enrollment and changes to deductions from payroll. Even if some employers need paper, barcodes on forms will reduce the overall administrative costs for the program. The APA also recommends that states provide sufficient implementation time of six to 12 months for employers to adjust their payroll processes to accommodate state plan requirements. Employers will need a process for remittances and adjustments as well as for notices of changes to employees' contribution amounts. Two important issues are:
- Ensuring that the state plan can accommodate inconsistent contributions
- Establishing the priority order of deductions
For example, employers do not want to guess whether to distribute a percentage of an employee's wages to a mandatory state retirement savings plan only after paying for Affordable Care Act (ACA)-required health care insurance or paying a court-ordered garnishment. Current State Action
Despite potential administrative costs, the APA's position is not to block state retirement plan legislation, but to steer it in the least burdensome direction for employers and payroll professionals. The APA cannot ignore state issues regarding retirement savings. According to a study by The Pew Charitable Trusts, between 2012 and April 2016:
- Five states enacted retirement programs (Illinois, Massachusetts, New Jersey, Oregon, and Washington);
- 27 states introduced legislation with a variety of approaches to retirement planning
- 18 states took no action
Of the 27 states that introduced legislation, some created boards to develop state retirement plans (California, Connecticut, and Maryland). The plans recommended by these boards may require a second round of proposed legislation to implement or could go directly to the regulatory process either through the board or a designated state agency. These numbers show that the 2017 legislative season likely will include more activity on retirement planning at the state level.
In states where legislation failed to pass, many bill sponsors have stated publicly that they plan to reintroduce their legislation. Utah State Senator Todd Weiler stated, during a Pew briefing at the end of June, that his bill failed because his colleagues viewed the proposal as a social welfare measure. In politically conservative states such as Utah, state retirement plan legislation is more difficult to pass. However, Weiler said he believes that he can create a market-based approach with tax incentives that will overcome his colleagues' objections.
Colorado State Representative Brittany Pettersen is working on legislation similar to Illinois' mandatory Secure Choice Retirement Program. That program requires that businesses with 25 or more employees operating for at least two years and not offering their employees a retirement plan must provide employees with information on the state retirement plan and make payroll deductions. At the Pew briefing, Pettersen said a market-based approach as proposed in Utah would still leave 50% of employees without options in Colorado.
Indiana State Representative Sean Eberhart is looking at a third approach, which is to develop an Internet portal for employees to engage in private plans offered by financial companies while encouraging employers to adopt their own plans. Legislation introduced in 2015 by State Representative Matthew Lehman, with a companion bill from State Senator Greg Walker, called the Hoosier Employee Retirement Option (HERO) plan, is still pending. The HERO bill would create a board responsible for developing the processes and procedures for implementing a plan. Indiana's delay in passage of a private sector retirement plan may be associated with struggles over legislation to reform public employees' pension plans.
Most small businesses cite cost as the key barrier to offering employer-based retirement plans. The advantage of state retirement plans is that they combine multiple employers and investment returns into a single asset pool, greatly reducing and even eliminating the fiduciary responsibility of employers. However, the cost to administer mandatory state programs through payroll, whether managed internally or outsourced, remains with employers and is not recoverable through these programs. Therefore, the APA must remain diligent in following state retirement planning developments.
The APA GRTF Retirement Accounts Subcommittee holds a one-hour conference call on the third Tuesday of each month when issues on federal and state retirement planning are discussed. APA members who are interested in participating may contact Alice Jacobsohn at 202-248-3901 or [email protected] Alice P. Jacobsohn, Esq., is Senior Manager of Government Relations for the APA.