On Wednesday, Congress repealed an exemption from the Employee Retirement Income Security Act (ERISA) that would have enabled states to more easily set up state-run retirement plans. Those who stood to benefit most from the exemption were workers without access to employer-sponsored retirement accounts.
The exemption was instated by the Department of Labor during the Obama administration. While the repeal doesn’t mean states have to scrap their plans to create these retirement accounts, moving forward with them might be harder to do.
Congress rolls back rule that could have made state-run retirement plans more accessible
The rollback Congress passed this week centers on an exemption that would have allowed states to create their own retirement plans without having to comply with ERISA.
ERISA is an act that “sets minimum standards for most voluntarily established pension and health plans in private industry,” explains the Department of Labor. Compliance with this act can come at a heavy cost for states — that’s why this exemption was created.
The high cost of compliance with ERISA could deter some states from setting up their own retirement plans. Being exempt from these costs would have enabled states to create more affordable retirement programs.
How the state-run retirement programs would have worked
CNN describes the way these programs were supposed to work:
“Though the details vary by state, the basic model is to automatically enroll private sector workers who don’t have a retirement plan through their jobs into a state-sponsored IRA, with a provision to opt out. The IRA would be vetted by the state, but provided by a private firm.”
Up until now, seven states already had retirement plans underway (with many more in the works). These plans can continue to operate but must do so without the exemption from ERISA.
Even still, a few states have decided to surge forward. California has already hired a director for its retirement program and Oregon expects to launch its plan this summer.
Why states are creating their own retirement programs
Why create state-run retirement plans in the first place? Because employer-sponsored plans don’t seem to be enough to help workers save.
In 2016, the Federal Reserve released its Report on the Economic Well-Being of U.S. Households in 2015, which highlighted a serious gap in retirement plans among Americans: A whopping 53 percent of people say their employer doesn’t offer a retirement plan.
What’s more, another 5 percent report that “their employer offers a plan for which they are not eligible, and 19 percent do not know if a plan is offered or not.”
How you can take your retirement into your own hands
Regardless of your stance on the ERISA exemption and its rollback, the number of Americans saving for retirement without the aid of their employers is glaring. The best way to make sure you save enough is to take charge of your retirement planning.
Sign up for an Individual Retirement Account
Whether or not your employer offers a 401(k) or similar plan, you can still sign up for an Individual Retirement Account (IRA) on your own. There are two main types of IRAs to choose from: Traditional and Roth IRAs.
One of the most important differences in these plans is how they are taxed. With a Traditional IRA, you don’t pay taxes on the money you contribute, but you do pay taxes when you withdraw funds. With a Roth IRA, you pay income taxes on the funds you contribute, but you don’t pay taxes on your withdrawals.
For both of these plans, the current contribution limit is $5,500 per year, or $6,500 per year if you’re 50 or older. Learn how to open an IRA so you can start saving today.
You could also sign up for a myRA, a retirement plan backed by the U.S. Treasury. It’s designed specifically for those who don’t have employer-sponsored retirement benefits and is a form of a Roth IRA.
Automate your savings
If you’re going to take charge of your retirement, a great way to do so is by automating your savings. You can use robo-advisors like Betterment and Wealthfront to automatically deposit a monthly contribution into an IRA account.
When you set up automatic savings, you’re prioritizing your future needs. With the power of compound interest, saving even a small amount of money now will make a big difference down the road.
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