State Secure Choice Programs: Helping Your Clients Navigate Their Options

  • A guide for Advisors, Accountants, Benefit Brokers, Payroll Providers and other practitioners to help guide your employer clients with employees in the affected states.

Overview

Everyone deserving the option to retire is a noble philosophy that modern U.S. society has embraced.  Paying for this, on the other hand, has been a mixed bag.  Social Security provides a bare minimum of benefits which leaves us with personal savings such as 401(k)s, 403(b)s  and IRAs and for a dwindling fortunate few, defined benefit pension plans.  Many states (and some large) cities have taken action to thwart the looming social costs of supporting millions of elderly who won’t have sufficient personal retirement savings.

These states have put into place Secure Choice programs where employees will have access to a workplace retirement account. Most states such as CA, OR, IL, MD, NJ, CT and NM are making it mandatory for employers (based on a minimum number of employees) to participate in Secure Choice OR have their own qualified employer-sponsored retirement plan such as a 401(k) plan, SEP IRA, SIMPLE, 403(b) plan, or defined benefit pension plan.    Secure Choice programs have thus far withstood numerous court challenges (specifically, California) and opposition from the federal government (since 2017).

Some other states such as NY, VT, WA and MA have voluntary programs (not a mandate) such as open Multiple Employer Plans (MEPs) or state facilitated marketplace programs.  Many states are actively filing legislation to develop Secure Choice programs or study them in more detail.

Secure Choice may be a great fit for many employers and their employees.   However, between the required work placed on the employer and the costs to employees, there are other options available. The purpose of this guide is to help you as a trusted partner for your clients to help them make the right choice.

What do the Secure Choice Programs look like?

(based on IL, CA and OR thus far)

  • Roth IRAs (Traditional IRAs planned for future availability)
  • Institutionally priced investment options including:
    • Target Date Funds
    • Capital Preservation Fund(s)
    • 1-3 Index funds
    • ESG fund (CA only)
  • Automatic enrollment at a 5% default rate
  • Payroll deducted contributions
  • Annual increases of 1% (except IL)
  • Employee paid/ No Employer fee
  • Not an employer sponsored plan and exempt from ERISA

For CA and OR the 1st $1,000 for each employee goes into a Capital Preservation fund (money market fund) unless the employee opts otherwise. Account balances over $1,000 are then defaulted into an age-appropriate target date fund.  IL has  a 90 day period where contributions are held in a cash fund and then moved to an age-appropriate target date fund.

Employers (or their designees)  must add and update employee rosters, send payroll deductions and make changes to employee deductions as directed by the Secure Choice program administrator.  As of this writing, there is no automation with payroll providers to facilitate this however, Ascensus (the program administrator for all 3 states currently in operation) is developing it.  File Transfer Protocol (FTP) file transmission is available too. Some programs hold the employer responsible for providing enrollment materials to employees or providing the program administrator their email address.

The employer is expected to be unbiased and have no role in helping employees to decide to participate or how to invest.  This is intended to protect the employer from ERISA fiduciary liability. That said, the current federal government doesn’t share this view and there is the potential for additional litigation.

Ascensus, the program administrator, handles employee service, withdrawals, beneficiary designations, etc. They also provide the employer portals and tools for employers to perform most of their administrative responsibilities under the Secure Choice Programs.

Enforcement of employer responsibilities is handled by the States and not Ascensus.

Even if you have a client that already has a workplace retirement plan, each state with a Secure Choice mandate does require each employer to register their exemption with the program to avoid future notifications regarding compliance.  There are no direct penalties thus far about complying with this requirement, just the implied harassment factor.

Here is a summary of the 3 states that have mandatory Secure Choice programs and 4 key considerations for each state’s respective program.

State/ ProgramWhen Effective/Required EmployersWhen must employees be added (from their hire date)?Employer Fines for Non complianceEmployee Fees (annually)

Illinois Secure Choice

NOW in effect! 25 or more employees and  2 years in operation60 daysUp to $500 per Employee annually0.75%

Oregon Saves

NOW in effect! Employers with 5 or more  employees

 

Employers with 4 or fewer employees: by January 15, 2021

60 days$100 per eligible employee, up to a maximum penalty of $5,000 per year~1.0%

California

CalSavers

Open now

 

>100 employees by September 30, 2020 

>50 employees by June 30, 2021

5 or more employees  by June 30, 2022

30 daysUp to $750 per Employee0.825% to 0.95%

States with Secure Choice Programs in Development

State/ ProgramLatest Progress/ When expected?Required EmployersOther
MarylandSavesApril 30, 2002 Deadline for provider RFPs10 or more employees that work 30 hours/weekPlans to have a managed payout fund (retirement income)

 

Offering $300 credit for each employer

New JerseyExpected, March 28, 2021. Can be pushed back by 1 year.

 

To be rolled out in phases, with large employers going first.

25 or more employees (2 years of operation)$500 per employee fine for failing to timely enroll employees with potential increasing penalties for multiple violations.

 

Employers that fail to deposit any portion of contributions will be subject to a penalty of $2,500 for a first offense and a penalty of $5,000 for the second and each subsequent offense.

ConnecticutApril 2020, selected Sumday, a subsidiary of BNY Mellon, as the administratorMore than five employees that are at least 19 years old and making at  least $5,000 annually 
New MexicoSigned into law Feb. 2020  

Top 10 Types of Employers That Should Use a 401(k) Plan Instead of Secure Choice.

Please note, there are options other than 401(k) plans an employer can adopt that exempt mandatory participation in Secure Choice.

1. Does the employer have a lot of employee turnover and/or a lot of part time employees?

Many employers such as ones in retail, food service, agriculture and temporary labor often experience high rates of employee turnover especially within the first 3-6 months of employment.  Secure Choice essentially requires all W2 employees (age 18 or over) to be added to the employer’s roster through Ascensus within 30-60 days of hire. This can be quite an administrative burden for most employers.  Plus, there is the risk of fines for non-compliance.

A 401(k) plan can limit eligibility to employees who work 1,000 or more hours in a year and/or have 1 year of tenure.  With the recently passed SECURE Act, part time employees are allowed to participate in a 401k after achieving 500 hours of service each year for three consecutive years.

2. Would automatic enrollment cause confusion for their employees?

As effective as automatic enrollment has been to help nudge better individual savings behaviors, it has had the unintended consequence of creating employee HR communications problems for employers. Employees may not see or understand communications and may realize what is happening after they notice a change in their take home pay.  They will typically inquire with their employer’s HR /payroll function about what is happening.  Even then, the employee must then contact Ascensus to stop or change the deductions, risking more confusion and delays.

3. Are there a lot of highly paid employees or employees that already have personal IRAs?

Keep in mind Secure Choice programs are basically Roth IRAs subject to IRA contribution limits that fall on the individual employee to monitor.  This is made especially more challenging for employees automatically enrolled (as mentioned in #2) who may not be paying attention.  Roth IRAs are also subject to annual income limits up to $124- $139K for single filers & $196K- $206K for joint filers as to how much can be contributed.  This table breaks it down in more detail.

FeatureSecureChoice  Roth IRA401(k) Plan Retail Roth IRA
ProviderAscensus onlyMany optionsMany options
Investment optionsState Board selects

 

Employer has no say.

Very limited: Target Date funds, Capital Preservation fund and 1-3 Index funds.

No advice or management available.

Employer can select

 

Usually more options available plus advice and management options.

Employee can select

 

Most options available plus advice and management options.

Employee Contribution limitsRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits$19,500 Pre Tax and Roth ($26K for Age 50+)  Key & highly compensated employees potentially limitedRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits
LoansNoYesNo
Ease of withdrawing fundsEasy, any time and reason) Tax impacts though.

 

More exemptions to early w/d penalty

No Fee

More restrictive,

 

Typically charges a fee.

Easy, any time and reason) Tax impacts though

 

More exemptions to early w/d penalty

Fees vary

Employer Contributions (ie Company Match)NoAllowed, optionalNo
Automatic EnrollmentMandatoryOptional (depending on provider)Not applicable, Individual chooses
Fees/CostsEmployer- None

 

Employee- (0.75-1.00%) of account balance

Employer- Varies (some are 0)

 

Employee- Varies (some are 0)

Average Total cost is 2.23%  per 401k Averages Book

Employer- NA

 

Employee- Varies (many are free)

4. Does the employer have employees in multiple states especially in states with mandatory Secure Choice programs?

If so, this can be an administrative nightmare and can create an unfair balance of benefits in employees varying by their state of employment.   It would likely be much easier to have a 401(k) plan for ease of administration and consistency with employee benefits.

5. Could the employer and employees be subjected to Ascensus’ marketing and sales?

Ascensus is a large, well known provider of retirement and savings products and is well regarded in the industry.  Vanguard entrusts its small plan 401(k) plans to Ascensus. Thus far, IL, OR and CA have selected Ascensus as their sole Secure Choice provider.  Ascensus provides its own suite of retirement plans and other employee benefits. States may have limitations in their contracts with Ascensus regarding direct marketing of their products.  Even so, employees and employers will have a relationship with Ascensus through Secure Choice.   Entering the Secure Choice business is certainly an entrepreneurial endeavor for Ascensus who is taking the risk that it will eventually be profitable.  That said, Ascensus has had its fair share of setbacks between private equity firms exchanging ownership stakes, a botched IPO plan  and a recent acquisition binge.

6. Is the employer sensitive about sharing private data with a provider they have not vetted themselves? 

Employee data such as Social Security Numbers (SSNs), e-mail and mailing addresses and other personal information as well as the employer’s Tax ID number and bank information must be shared with the program administrator, Ascensus.  By all accounts, Ascensus has the requisite cyber security bonafides, but what if there is a breach?

7. Is the Employer technology-challenged/overwhelmed?

The employers’ responsibilities under Secure Choice require the employer (or its designee) to regularly add/update employee records, remit payroll deductions and other tasks by logging into an online employer portal and coordinating with their payroll vendor.  As mentioned previously,  there is no automated payroll integration with Ascensus, currently. This may be too much for some employers to bear where 401(k) plan administration can be handled by full-service providers (some high touch/low tech or vice versa) and payroll integration is widely available.

8. Where a flat % payroll deduction can be problematic.

When an employee’s payroll deduction is percentage-based it often results in unintended fluctuations in take home pay.  This is especially true for many hourly and variable compensation (such as commision-based) employees who would prefer a dollar-based election like $20 per week.  The current Secure Choice programs allow only a percentage based election.  401(k) plans will often allow more flexibility that allows payroll deductions to be dollar-based, percentage-based or both.

9. Can the employer afford to pay?

Even if they can afford a little bit there are many low cost 401k options available and some are zero cost to the employer.  Also, with the federal start-up 401k plan tax credits this can make it even more palatable.

10. Is the employer comfortable being a fiduciary?

The sponsor of a 401(k) plan always has some fiduciary responsibility (for the DOL’s expectations for plan fiduciaries see here).  An employer can enlist co-fiduciary professional specialists to handle administration such as a 3(16) fiduciary and/or an investment professional (such as an advisor) to act as a 3(21) or 3(38) fiduciary to minimize their fiduciary obligations.

Which Employers Should Consider Secure Choice over 401(k) and other plans?

  • Do many of its employees not communicate in English?

Many Secure Choice programs are offering employee materials and support in a variety of languages that typically aren’t available with other retirement plan options at a comparable cost.

  •  Did the employer have an ERISA plan previously but got into trouble?

If an employer mishandled a prior ERISA plan such as a SEP-IRA, 401k plan or even a non-retirement benefit plan, they may be prohibited from sponsoring another ERISA plan by the IRS, DOL or other authority.  Similarly, maybe they ran afoul of rules and voluntarily terminated a plan but will be under tighter regulator scrutiny should they sponsor another plan or should just completely avoid this responsibility entirely. In these cases, Secure Choice with its non-ERISA status (at least how the States interpret ERISA) would be preferable.

  • Wants no fiduciary responsibility, whatsoever.

Limiting and eliminating fiduciary liability is a real concern for many employers. 401(k)s and other plans have ways to limit this liability, but Secure Choice programs were deliberately designed to be exempt from ERISA fiduciary obligations by the states that created them.

Ways to help Employers

Help them weigh the costs.  Even though there is no fee for Employers, they incur costs for handling payroll and employee data through Secure Choice.  There is no payroll integration automation currently. For example:

  •  Estimated 5 minutes to add or remove each employee
  • May have to distribute program materials (new hire packet)
  • Estimated 15-30 minutes to remit payroll deductions each payroll
  • Typos, mistakes, errors, questions can take hours or days to resolve

Also, they should consider these potential costs:

  • Risk of fines/penalties for not adding employees or failing to remit contributions
  • Dealing with employee relations especially for auto enrollments
  • Opportunity cost of gaining assets in an employer sponsored plan to get better terms. Remember: Roth IRAs cannot roll into 401(k)s!

If the Employer already has an eligible retirement plan:

  • Check in to see if they have registered their exemption with the State and offer to help them if they haven’t. See these links for more info: Oregon, Illinois, &  California. Note, CA requires an initial access code. If the employer doesn’t have one they can request it here. It can take 2 days to obtain it.
  • See if they would be interested in using Secure Choice for ineligible employees of their current retirement plan(s). Employees can sign up and fund it directly & the employer can opt to facilitate payroll deductions.
  • Inquire about how they are doing with their current plan and providers, maybe they are considering terminating their plan but would then have to participate in Secure Choice anyway.

If the Employer is already subject to the mandate (i.e their deadline has passed), ask if they are participating

–           If they are,  inquire how it is going and f they are having trouble with it

–           If not, inform them of the requirement and potential fines.  Help them with their options.

If the employer has their Deadline coming up:

  • Inform them of the requirement, discuss their options
  • Could join Secure Choice now, determine if it’s a good fit and then make a decision later about getting a 401(k) or other eligible plan, instead.

Opportunities to help Employees impacted by Secure Choice

Employees have limited investment options in the Secure Choice Roth IRA programs and no advice or management of their accounts is available either.  Investment professionals can offer a lot of help to employees who need guidance. Also, some employees may be better served with a Roth IRA through another provider, a Traditional IRA or other individual accounts because of their specific situations or income considerations.