Love Philly? So do we. Let’s be friends. Sign up for the Billy Penn newsletter today.
It’s pretty easy to set up a retirement savings account that will provide some extra money when you’re older — and give you a tax break along the way.
Many people do so through their jobs, while others go online and open an individual retirement account (IRA) at a bank or financial services company. They can have a set amount pulled from their bank account every month — $10 or $100 or whatever they specify — and put into a stock fund or other investment that will increase in value over time.
Yet despite how easy and important that process is, millions of workers aren’t saving for retirement, especially those who aren’t offered a plan at their jobs.
“Someone who doesn’t have access to an employer plan could certainly go and open an IRA account, but we know from research and behavioral insights that people do not do that. Because of inertia and other factors, they don’t take the steps which would really be in their financial best interest,” said Angela Antonelli, a Georgetown University professor who heads the school’s Center for Retirement Initiatives.
With that in mind, Philadelphia just took a step toward automatically enrolling residents in retirement savings plans, thanks to voter approval of a ballot quesstion.
The measure approved last week paves the way for the launch of PhillySaves, a new program that will create IRA accounts for roughly 208,000 workers. Employees can opt out, but if they choose to participate, they’ll have about 5% of each paycheck automatically put in their IRA.
The new system won’t solve retirement insecurity overnight, said City Council President Kenyatta Johnson, who co-sponsored the authorizing legislation. But the savings accounts will eventually supplement meager Social Security payments and allow some moderate-income residents to avoid working long past retirement.
“Philadelphia is no longer the poorest big city in America, but we want to continue to lift Philadelphians out of poverty and grow generational wealth,” said Brett Nedelkoff, Johnson’s director of policy and strategic initiatives. “PhillySaves is a tool we can use in our long-term anti-poverty strategy.”
How will the program work?
The mayor and City Council will appoint members to a new Retirement Savings Board, which will pick a financial services company to offer the IRAs. The program will launch by July 2027.
It will cover companies and nonprofits in the city that have at least one employee and don’t already offer retirement plans. The board will set a default investment rate — the amount taken from paychecks — of 3% to 6%. Workers can adjust their rate at any time.
Gig workers and other 1099 employees won’t be covered initially, although the board could create an option for them in the future.
Employers’ obligations will be pretty minimal, said John Scott, who studies retirement policy for the Pew Charitable Trusts and provided the city with recommendations on how to set up PhillySaves. They’ll have to provide the city with a list of their employees and arrange for the paycheck deductions
While it’s common for companies to match employee contributions to in-house retirement plans, like 401(k) and 403(b) accounts, in the case of PhillySaves they’re not required to put in any funds — and in fact, they’re not allowed to contribute.
That’s because contributions would trigger federal regulations on employer-sponsored retirement plans and likely block the city program from operating.
Defaults to Roth IRAs, but switching is easy
To make sure employers meet their obligations, the Retirement Savings Board will establish a penalty on non-compliant companies of up to $250 per worker. But Scott said the experience from California and 16 other states that have similar auto-IRAs suggests companies will be happy to take part.
“It’s a benefit they’re able to provide, and I think a lot of employers see it that way. Like, hey, this is finally something I can do, because I’m not ready to offer a 401(k),” he said.
A company can also comply with the law by creating its own retirement plan. States with auto-IRAs have seen an uptick in employers adopting 401(k)s, Antonelli said.
Most medium and large companies already offer retirement plans as a benefit, so the workers who enroll in PhillySaves will largely be at smaller employers, Scott said. Antonelli said participants in the state programs have tended to earn $25,000 to $35,000 a year.
Like other public auto-IRA programs, PhillySaves will enroll workers in a Roth IRA by default, while allowing them to switch to a traditional IRA.
Both types invest the participants’ savings and are structured to discourage withdrawals until account holders are at least 59 1/2 years old. However, under federal law they are taxed differently and offer different benefits.
A key advantage of Roth IRAs for low- and moderate-income workers is that participants can withdraw their original contributions at any time, without having to pay any penalty or taxes. (Withdrawing investment earnings may draw a penalty, however.)
“We’ve done some work in other states, and we found that 90% of the withdrawals are for an emergency. The fact that you can pull it out at any time and cover that $2,000 car repair, and you need your car to get to work, that is actually a big selling point to a lot of these participants,” Scott said. “It does have that flexibility, that if you really need the money in the short term, you can get access to it.”
Questions about deductions and fees
On social media and elsewhere, some people have raised concerns about auto-IRAs like PhillySaves. One question: Could you ending having money taken from your paychecks without your knowledge?
That shouldn’t happen, according to Scott. The Retirement Savings Board will send a notice to employees telling them they’re going to be enrolled, explain how to opt out, and have employers wait 30 to 60 days to start making payroll deductions.
If an employee is nonetheless surprised when deductions start, the firm running the IRA can refund the money without penalty, he said.
Another question: Why invest in an auto-IRA that charges relatively high fees?
If you independently sign up for an IRA at a financial services company, you can find funds that charge fees close to 0%. But auto-IRAs, like California’s CalSavers, often initially charge nearly 1%, which is considered very high. PhillySaves is also likely to have relatively high fees at first.
That’s in part to cover the city’s costs to oversee the program, which Pew estimates will run to $1 million the first year and $500,000 in subsequent years, and will go primarily toward publicizing the program and educating employers and workers. In addition, investment firms always charge higher rates to run small retirement plans, Scott said.
“It’s very costly, from a financial service provider’s point of view, to set up and run these small plans,” Scott said. “The cost of the call centers, the communication materials… all that infrastructure costs money, so the fees are a little bit higher — but [PhillySaves is] still cheaper than if the employers went out and tried to get a 401(k) themselves.”
Nedelkoff said the board could look into entering an interstate compact, which would lower costs by having Philadelphia join another state’s existing IRA program. She also noted that California’s plan reduced its fees after reaching higher enrollment levels, and said PhillySaves may be able to do the same in the future.
The benefits of a city-run plan
Some skeptics have dismissed PhillySaves and the retirement board as opportunities for government misconduct — “another slush fund for some future government officials to bleed dry,” in the words of one Reddit commenter, and an opportunity to give out “lucrative contracts,” as another wrote.
Scott acknowledged that government contracts can be mishandled, while noting that IRAs are governed by federal law, and the investments will be owned and controlled by the individual workers, not the city. A financial firm will manage the money, as is common with state-sponsored investment programs like Pennsylvania’s 529 college savings program, he said.
As the first city to have its own auto-IRA program, Philadelphia may actually be able to keep its operating costs down, Scott said.
“Unlike these big states like Colorado or New Jersey, where you have to cover a wide geographic area, Philly is pretty condensed and also has a rich network of neighborhood and community groups and nonprofits. That marketing outreach could probably be done pretty efficiently,” he said. “We do think the board, once it’s constituted, can probably do that marketing and outreach and education at a lower cost.”
In the long term, PhillySaves could also help the city and state financially by reducing seniors’ dependence on housing assistance, healthcare support, and other taxpayer-funded safety net programs, Nedelkoff said.
More broadly, “retirees with savings tend to have more spending power and greater housing stability, which can contribute to neighborhood stability and local economic activity,” she said. “Supporters see this not just as an individual benefit, but as a long-term resilience measure for the city economy.”
Another criticism of public auto-IRAs is that employers aren’t allowed to match employee contributions, which results in those workers accumulating savings more slowly.
However, they could get some new help next year, when the federal government will launch its own contribution matching program for low-income workers, called the Retirement Savings Contribution Credit. Depending on an employee’s income levels the feds will provide a match of up to 50% of their IRA investments, up to $1,000 per year for individuals and $2,000 for couples who file their taxes jointly.
“This would be one way to supplement what the workers are saving, and encourage the savings,” Scott said.
