Starting is the hardest part. In hopefully what is a sign of things to come, The Upshot reported on a new retirement savings program offered in Illinois called Secure Choice.
The plan is meant to fill the void for people who don’t have a retirement plan through work. It’s a voluntary program with one defining characteristic. You need to opt out to stop saving.
Dealing with a retirement plan for the first time can be intimidating. That was my first experience as I watched coworkers stare at a packet of fund choices like it was a Chinese takeout menu. The plan
administrators salesmen’s best advisor impression only confused things more. Only a few of us signed up.
Research shows the opt out retirement plans, with automatically enrollment, have a higher success rate in starting and continued savings. Simply, friction from confusion or just the paperwork, stops most people from using the savings tools offered through work. The same friction stops most people from opting out.
Still, the new plan is not without problems:
- It goes into effect in 2017. Why does it take two years to get this set up and running?
- Nothing changes with existing employer sponsored retirement plans. More people would be better off if all employer offered plans were set to opt out.
- Funded by 3% of income, which is too low for retirement savings, but better than nothing. I would like to see at least 6% or a gradual increase over time. Or both!
- The default option is a target date fund. I’m not a fan. These funds are a simple solution (and better than nothing) but not always the best solution, especially when you consider the costs.
- Costs will reach up to 0.75%. All costs are paid by the savers, not the state. Illinois can’t afford it, but savers can do better. I pieced together a solid retirement portfolio of index funds at 0.30% or less (ETFs at 0.15% or less). The state should push for a lower cost option.
It’s nice, as a resident, to see Illinois do something good for a change. The financial bumbling in Illinois has been an embarrassment. Politics aside, the opt out plan is a good start that could be great with a few fixes.
- For Investors, It’s a Perfect Time to Go Back to the Basics – B. Ritholtz
- 6 New Year’s Investing Resolutions – Morningstar
- In Assessing 2015 Goals, Be Wary of ‘Risk Creep’ – C. Richards
- Don’t Interfere With Your Investment Strategy – Irrelevant Investor
- How Investment Advice Is Like Medical Advice – M. Housel
- Ten Investing Facts of Life – Bloomberg
- How To Think About Bear Markets – L. Swedroe
- Richard Branson on Deciding Whether or Not to Invest in a New Venture – R. Branson
- Here’s How a Strong Dollar Will Hurt Investors in 2015 – Marketwatch