No 401(k)? NJ Lawmakers Try to Give Private-Sector Workers Another Way to Save

John Reitmeyer | December 10, 2018 | Budget
For people working in companies that don’t offer retirement accounts, legislators want to set up a pathway to building a nest egg

seniors paying bills
Saving enough money to provide for a stable retirement is a big concern for many New Jersey residents given the state’s high cost of living, and lawmakers are once again trying to give those who can’t put aside funds through their employer a good way to build up a nest egg.

A measure that would establish a state-sponsored savings option using a private-sector investment firm for people who work for companies that don’t offer retirement plans is once again making its way through the Legislature.

Modeled on similar funds that several other states have set up to boost overall retirement savings, the legislation would also create an automatic payroll deduction that most companies in New Jersey would have to set up for their workers if they don’t already have a savings plan.

A similar proposal won widespread bipartisan support in 2016 before it was rejected at the finish line by then-Gov. Chris Christie, a Republican who cited concerns about creating a new mandate on businesses and interfering with the private sector.

While some of the same concerns are being raised as a new version of what’s known as the “Secure Choice Savings Act” is once again picking up steam in the State House, advocates for the proposed savings program say that the underlying problem of residents in high-cost New Jersey not being adequately prepared for retirement is as bad as ever.

Many in NJ have no employer-provided retirement account

Assemblyman Roy Freiman (D-Somerset)
“This is a very significant issue,” said Assemblyman Roy Freiman (D-Somerset), a primary sponsor of the measure, during a recent committee hearing. “Doing more of the same is not going to solve it.”

According to AARP, an organization that supports the retirement-savings measure, roughly half the state’s working population does not currently have access to an employer-provided retirement account that allows them to put aside a pre-tax portion of their income directly out of their paychecks. The group also estimates that federal Social Security benefits generally fall short of what the typical older family in New Jersey needs to cover basic expenses like food, utilities and healthcare, expenses that can cost at least $23,000 annually.

Ev Liebman, director of advocacy for the AARP in New Jersey
“Social Security was never meant to cover a retiree’s full range of retirement obligations,” said Ev Liebman, the director of advocacy for AARP in New Jersey.

To help fill the gap, the proposed measure would require companies in New Jersey with more than 25 employees to set up an automatic payroll deduction into a state-sponsored retirement plan that would be established for employees whose companies don’t already offer some form of a retirement-savings program. Companies would not be required to contribute any matching funds, but they would have to allow employees to automatically have 3 percent of their income deducted for retirement savings unless an employee chose not to participate or to contribute less.

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.

Opting in or opting out

To manage the funds, the bill calls for linking the workers with a private-sector retirement-savings investment firm. Employees could opt out altogether if they didn’t want to participate, and state employees would not be allowed to participate.

A seven-member board, whose members would be appointed by the governor and top legislative leaders, would oversee the program.

Several other states have already created similar retirement-savings systems, including California, Connecticut, Illinois, Maryland and Oregon, according to AARP. So far, the New Jersey legislation has passed committees in both the Assembly and Senate but has yet to go before either full house of the Legislature.

While private-sector workers whose employers do not offer a retirement-savings option can already set up an IRA or some other account with a private-sector financial firm, the problem, according to the AARP’s Sarah Mysiewicz Gill, is that most people don’t. Providing an automatic payroll deduction is also a key issue, she said.

“If you don’t have a way to save out of your paycheck, only about 5 percent of those people go out and do so,” Gill said. “People are 15 times more likely to save if they can do so at work, and 20 times more likely to save if that access is automatic.”

“That makes a significant difference,” she said.

Business interests have concerns

But that “opt-out” feature of the legislation is an issue for several state lawmakers and representatives of private industry who raised concerns about the bill during committee hearings. They would prefer to see workers given the option of voluntarily participating in the proposed savings program. That way, they could “opt in” if they’d like to instead of being automatically enrolled and then having to “opt out.”

“I think an ‘opt-in’ (program) is a heck of a lot better than ‘opting out,’” said Sen. Anthony Bucco (R-Morris).

Another issue raised during the committee hearings is whether the bill could unintentionally put businesses on the hook for any problems that could arise with the investment accounts if they are mismanaged. While language has been written into the bill to explicitly address that concern, several industry experts said a federal court could still determine that federal law relating to employer liabilities for retirement savings plans could supersede state legislation.

“The employer has a lot of involvement in this,” said David Pascrell, a representative of the American Council of Life Insurers.

There’s also been some general concern about the state’s poor track record on fiscal matters and the management of its own retirement savings plans, including the public-employee pension fund, which is one of the nation’s worst-funded state retirement plans. But the retirement-savings legislation would limit the state’s involvement in the proposed private-sector plan to only providing general oversight via the seven-member board. No state funds would be invested and all risk would be assumed by any entities the board would contract with to administer the retirement system, according to the bill.

Freiman, a former Prudential Financial executive, said the legislation also incorporates best practices that have been recommended by the private sector, with the goal being to “crack the code on retirement savings.”

“We are trying to change behavior,” Freiman said.