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March 25, 2021

State could soon push more to save for retirement

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The legislation automatically would enroll employees of affected businesses, requiring those who don’t want to participate to opt out of the payroll deduction savings plan.
Access gaps are largest among employees of small businesses, low-income workers and minority workers, raising important equity concerns and expanding existing inequities in opportunities to build generational wealth.
— Report by Virginia College Savings Plan
By Graham Moomaw
Virginia Mercury

Thousands of Virginia workers would gain the option of automatically putting away part of their paychecks for retirement under legislation the General Assembly passed last month to help private-sector employees who lack access to a savings plan through their employer.

The bill, awaiting action by Gov. Ralph Northam, establishes a state-administered program that would offer IRA accounts to workers with no other retirement plan options, particularly employees of small businesses, self-employed people and gig workers.

The accounts would be optional, but workers would be enrolled by default and would have to opt out if they want to keep their whole paycheck. The plans would be portable, meaning workers could keep putting money into the same account even if they switch jobs.

Covered businesses would have to help interested workers participate in the program, mainly by setting up their accounting systems to allow payroll deductions to be made, but they wouldn’t have to contribute funds of their own.

The program, scheduled to take effect no sooner than 2023, would be run by the Virginia College Savings Plan’s governing board, a group of finance and investment professionals that already administers plans meant to help families build savings for higher education expenses.

Though the Democratic-led General Assembly sent the bill to the governor’s desk, they did so amid sharp disagreement over its scope, with the state Senate insisting on restrictions that proponents of the bill say could make hundreds of thousands of workers ineligible.

The Senate changes would make the program mandatory only for business with 25 or more full-time workers. The version approved by the House of Delegates would have applied to businesses with five or more employees, including part-time workers.

“Although I am very displeased with the restrictions, accepting this compromise is necessary to move forward with this important legislation,” Del. Luke Torian (D-Prince William), who has championed the idea for years, said near the session’s end as he encouraged the House to accept the Senate’s proposals.

Though legislators seemed open to debate over how big a business should have to be before having to participate, at least one Democratic senator said including part-time workers was a non-starter.

“Please, don’t mess this up by killing this amendment and then killing the bill,” Sen. Chap Petersen (D-Fairfax) said during debate on the floor as he successfully pushed an amendment saying only employees working at least 30 hours per week would be eligible.

The Northam administration spoke in favor of the bill during the session, but it’s not clear if the governor will sign the bill or propose more changes. Because the program won’t take effect for at least several years, lawmakers have time to make additional changes before the rollout. The bill also calls for the creation of a working group to make additional recommendations.

The bill passed largely along party lines, with Republicans mostly arguing it should be voluntary to avoid burdening businesses that may not have human resources staff dedicated to handling payroll issues and helping employees navigate the state-administered benefit.

The legislation grew out of a state study that found an estimated 1.2 million private-sector employees in Virginia, or about 45 percent, do not have access to a savings plan through their workplace. The bill was pitched as a way to boost retirement security for workers and close savings gaps among different types of workers.

“Access gaps are largest among employees of small businesses, low-income workers and minority workers, raising important equity concerns and expanding existing inequities in opportunities to build generational wealth,” officials with the Virginia College Savings Plan, also known as Virginia529, wrote in the report issued late last year.

Many details of the program would be worked out by the College Savings Plan board, but its study suggested a minimum contribution rate of 5 percent. For a 30-year-old worker making $14.42 an hour, officials said, that would translate to about $125 saved each month, potentially generating $198,000 by retirement at 67.

Three states — California, Illinois and Oregon — have implemented similar programs, according to state officials, and several others are in the process of setting them up. The Trump Department of Labor sided with a conservative tax group in challenging California’s version of the program, arguing it conflicted with rules laid out in the Employee Retirement Security Income Act. But President Joe Biden’s administration is charting a new course, signaling its support for states who want to enact auto-IRA programs.

Proponents of the bill argue that curtailing it too much defeats the purpose, particularly for part-time workers who might have multiple jobs offering little to no benefits. Having a state-run program, they say, could also help small businesses that can’t offer retirement benefits on their own.

John Scott, director of the retirement savings project at Pew Charitable Trusts, said a survey to weigh business sentiment about a similar program in Oregon found 73 percent of participating employers had a positive or neutral view of the program.

“They’re competing against larger companies that do have a 401K plan,” Mr. Scott said. “They see this as a no-cost way to offer retirement benefits until they get to a point where they can offer a 401K program.”

Pew Charitable Trusts, which supports the bill, is urging Gov. Northam to restore eligibility for part-time workers and amend the bill to require participation by businesses with 15 or more employees.

Nicole Riley, director of the Virginia chapter of the National Federation of Independent Businesses, argued the bill limits choice for both businesses and workers who already have the option of opening an IRA account if they want one.

“The government is saying you have to put away money unless you proactively say, ‘No, I don’t want to’,” Ms. Riley said.

Other lawmakers stressed that any paperwork or forms dealing with the program should clearly explain what workers’ options are.

To start the program, the College Savings Plan would have access to a treasury loan of up to $2 million per year for the next two years, but the program is envisioned to eventually be self-sustainable through fees charged to participating workers.

As the population ages, encouraging more people to save for their own retirement, the College Savings Plan study noted, could eventually save taxpayers $11.8 billion between 2021 and 2035, largely by reducing Medicaid costs.

“With a significant portion of the retired population having insufficient retirement savings,” the study says, “social benefits programs will continue to expand to meet increased need.”
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