Fine Print: State Wants to Help Private-Sector Workers Save for Retirement

John Reitmeyer | November 9, 2015 | More Issues
The state-managed individual retirement account would be fully funded by employees via payroll deductions

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What it is: An effort led by a bipartisan group of lawmakers that would for the first time give New Jersey a direct role in helping private-sector workers save for retirement. The legislation would create a state-administered individual retirement account that workers could opt to participate in if their employers don’t already offer a retirement-savings plan.

Under the bill, companies with more than 25 employees would be required to set up an automatic payroll deduction into the retirement plan for employees who wish to participate in it. Companies would not be required to contribute any matching funds.

Businesses with fewer than 25 employees that do not offer a retirement plan would be encouraged to offer the payroll deduction, but would not be required to do so.

Why is the state getting involved: Sponsors of the measure, including Assembly Speaker Vince Prieto (D-Hudson) and Senate President Stephen Sweeney (D-Gloucester) note federal studies show that more than 30 percent of Americans are not putting aside money for their retirements, relying instead solely on Social Security benefits. Given high costs like property taxes and prescription drugs that many New Jersey seniors have trouble affording, the lawmakers argue that it makes sense to offer this option to private-sector workers before they retire and are forced to move because they don’t have adequate retirement savings.

They also say that helping more residents save now for their retirements will ease the burden on state social services and safety-net programs in the future. The effort is modeled on a similar program being offered in Illinois.

The New Jersey bill has support from AARP, which says workers are more likely to plan for their retirements and put money aside when an automatic payroll deduction is offered. But business-lobbying groups have raised concerns about the state mandating another requirement that companies would be forced to comply with.

How it would work: Under the current version of the bill, which is up for review before a state Assembly committee this afternoon, the New Jersey Secure Choice Savings Program Fund would be established to receive the funds that private-sector employees put aside for their retirements.

A seven-member, volunteer board would be formed to administer the fund. It would include representatives of the state treasurer, state comptroller, and director of the state Office of Management and Budget. Two members of the public who are experts in retirement investment would also be appointed, along with representatives of participating employers and participating employees. The public appointments would be made by the Assembly speaker, Senate president, and the governor, with the Senate maintaining advice-and-consent authority over the gubernatorial appointments.

The board would be responsible for designing and implementing the retirement plan, including selecting a trustee, determining appropriate risk management, and hiring staff or entering into contracts for administering the retirement plan.

Private-sector employees would be allowed to pick from a series of investment options and set their own contribution level, with the default being 3 percent of wages. Employees could also opt out altogether, and state employees would not be allowed to participate.

To shield the state from liability, protections would be put in place to ensure all risk would be assumed by any entities the board would contract with to administer the retirement system. Penalties would also be established for any employer that does not facilitate their employees’ enrollment in the retirement plan if the employees don’t elect to opt out.

State-run retirement plans for public workers: New Jersey already offers two main retirement options to public workers, the traditional defined-benefit pension system and a 457(b) retirement-savings plan that is similar to a private-sector 401(k).

The state pension system provides retiring workers with a defined monthly payment based on how long they were employed by the state and how much they earned, among other considerations. The pension system is funded with contributions from both the employees and state or local governments, and those funds are then invested.

But the state has not been making the full contributions called for by actuaries over the past two decades, leading to an estimated $40 billion unfunded liability. And experts predict that some funds within the broader pension system could run dry within a decade. That type of funding problem would not be encountered under the proposed private-sector retirement-savings plan because there would no reliance at all on state contributions.

The 457(b) plan, meanwhile, is a defined-contribution plan, meaning it relies on regular, tax-deferred contributions that are typically invested, but do not automatically yield a guaranteed monthly payment upon a state worker’s retirement.

The 457(b) is offered to state employees as a way to supplement their pensions and there is no state contribution. That alternative option has drawn more attention in recent years as the state pension-funding problems have worsened, and as
Gov. Chris Christie has proposed sweeping changes to employee benefits. They include freezing the current pension system and shifting employees into a new, hybrid retirement plan that would have some features of a traditional pension and some of a 401(k) or 457(b).

What happens next: The bill that would establish the New Jersey Secure Choice Savings Program Fund has already been passed by the labor committees in both the Assembly and Senate. The Assembly Appropriations Committee is also planning to take up the bill during a meeting this afternoon. Sponsors have said they hope to have the measure on Christie’s desk before the end of the year.