Congress Votes to Derail State-Sponsored IRA Savings Plans
The Senate voted Wednesday evening to undo Obama-era rules for state-sponsored retirement plans that could help millions of Americans who work for small businesses save for their futures.
The House already approved the measure, which now goes to President Donald Trump, who is expected to sign it.
“The bill’s passage is not the end for state retirement plans, but it’s likely to slow their development,” says Diane Oakley, executive director of the National Institute on Retirement Security (NIRS), a nonpartisan group in Washington, D.C.
States and cities last year were encouraged to set up auto-IRA programs for small-business workers who lacked employer savings plans. These plans operated similarly to 401(k) plans—allowing employees to automatically transfer money to an IRA through a payroll deduction.
To speed their adoption, the Labor Department issued rules clarifying that these auto-IRA programs would not be subject to the more onerous regulations governing 401(k) retirement plans.
But in February two Republican congressmen introduced a pair of bills aimed at rolling back the rules. One bill that targeted the city-sponsored plans has already been passed by Congress and signed by Trump. On Wednesday, in a 50-49 vote, the Senate passed a bill that undoes the rule for state-sponsored plans.
Federal rules already allow states to set up auto-IRA plans, but the Labor Department had provided added assurance that these programs would not run into regulatory hurdles.
“It’s likely that there will have to be a court case to further clarify the rules for state plans,” says John Scott, director of retirement savings at Pew Charitable Trusts.
More than 30 states are in various stages of developing auto-IRA programs, according to the AARP. Seven states have already passed legislation to set up these plans, including Washington and Oregon, which are scheduled to roll out their programs later this year, and California, which is aiming for 2018. All three will move forward with those plans, according to statements from the state treasurers.
But for plans not already underway, the regulatory uncertainty may deter some states from launching programs, Scott says. That would make the challenge of retirement savings more daunting.
Only about half of U.S. private sector workers are covered by a 401(k) or similar retirement plan. The rest, some 55 million Americans, lack access to a workplace program, which are most likely to be offered by larger employers. Those who are left out tend to be low-income and minority workers.
Given that savings gap, it’s not surprising that state and local savings plans have had wide bipartisan support. Some 75 percent of Americans agree that state savings plans are a good idea, according to a recent survey by NIRS, including 83 percent of Democrats and 72 percent of Republicans.
But some Republicans have been opposed to establishing these auto-IRA programs. In an earlier statement, Rep. Tim Walberg, R-Mich. who sponsored the bill to block state plans, and Rep. Francis Rooney, R-Fla. who sponsored the bill targeting city plans, argued:
“This last-minute regulatory loophole created by the previous administration would lead to harmful consequences for workers and employers. Hardworking Americans would be forced into government-run plans with fewer protections and less control over their hard-earned savings.”
Still, an auto-IRA plan, like a 401(k) plan, would be voluntary—workers could always opt out. But that automatic nudge from an employer plan is crucial to making savings happen. Some 90 percent of those with a workplace plan save, vs. just 20 percent without one, according to data from the Employee Benefit Research Institute.
The state auto-IRA plans, moreover, would use private investment firms to manage money. The Oregon plan, for one, has hired State Street Global Advisors to run low-cost index funds, which are also featured in many 401(k) plans.
Perhaps the biggest limitation of state programs is that they would create a patchwork quilt of plans. A single national auto-IRA plan would be more efficient, a study by the Center for Retirement Research at Boston College found. A federal auto-IRA was first proposed in Congress in 2006, but despite a bipartisan push, it never gained traction.
Even if state auto-IRAs regain momentum, making retirement saving happen is mainly up to you. So if you lack a workplace plan, set up your own. In 2017 you can put up to $5,500 of earned income into an IRA; up to $6,500 if you’re 50 or older.
Depending on your income and whether you have an employer plan, you may get a tax deduction on your contributions to a traditional IRA. Your money will grow tax-free, but withdrawals will be taxable .
By contrast, with a Roth IRA, you contribute after-tax money, which grows tax free. (The ability to contribute to a Roth phases out for singles with incomes of $118,000 and higher, and $186,000 for married couples filing jointly.) “If you’re expecting to be in a higher tax bracket at retirement, a Roth may be the better option,” says Andrew Sloan, a fee-only certified financial planner in Louisville, Ky.
If you aren’t sure about your future tax bracket, it may make sense to split your contributions between traditional and Roth IRA. “In retirement, the more tax flexibility you have, the better,” Sloan says.