Illinois just became the first U.S. state to adopt a new approach to a big problem in the nation's retirement saving system: the lack of workplace saving options for low-income workers.

Starting in 2017, companies that do not offer retirement plans will be required to automatically sign up their workers for a state-sponsored Roth IRA account, funded by a 3 percent (or higher) after-tax deduction from their paychecks, with the growth accruing tax-free.

The requirement applies to employers with 25 or more workers who have been in business at least two years, and workers can opt out if they choose.

Illinois will not be contributing to the new Illinois Secure Choice Savings Program (ISCSP) accounts, and investment management will be farmed to an outside firm.

The default investment will be a target-date fund, which reduces the allocation of higher-risk equities as the account holder gets closer to retirement, alongside four other simple fund choices.

The aim is to keep fees low -- not exceeding 75 basis points annually -- and far lower than that if the plan's sponsors have their way.

The new law puts Illinois at the vanguard of a growing movement to address the yawning gap in retirement savings for low-income workers. Initiatives are proliferating at the state and federal level, and the reasons are clear.

Ownership of retirement plan accounts has been falling sharply -- just 40 percent of households owned any type of account -- IRA, 401(k) or traditional pension -- in 2013, down from 48 percent in 2007, according to the Federal Reserve Board's triennial Survey of Consumer Finances released last September.

The Center for Retirement Research at Boston College estimates that at any given point, only half of U.S. private sector workers participate in a retirement plan.

In Illinois, 72 percent of private-sector workers in high-turnover, low-wage industries lacked access to a retirement plan, according to a study by the Woodstock Institute. By comparison, 70 percent or more of high-income workers are covered, industry data suggests. The study -- based on industry and federal government data -- found that ISCSP could potentially serve 2.5 million workers.

Plans like the ISCSP have been proposed in one form or another in more than half of the states.

"We've hit a critical mass on this concept," says Sarah Mysiewicz Gill, senior legislative representative at AARP, which has been working with proponents at the state level to advance the idea.

U.S. President Barack Obama has proposed creation of auto-IRAs at the federal level, and this year the administration is kicking off the myRA, a voluntary program aiming to help workers at companies that do not have retirement plans to set aside small amounts from their paychecks in a savings bond-like product.

Opposition

The Financial Services Institute (FSI), an industry lobbying group, recently announced that fighting Secure Choice plans will be among its top state legislative priorities this year. FSI, which represents independent broker-dealers and financial advisors, worries that Secure Choice plans will limit the opportunity of its members to work with small employers to create their own workplace plans.

"Some of these bills expressly state that financial advisors can't be involved in the process whatever," says Robert Lewis, FSI's vice president of legislative affairs.

FSI says it did not oppose the Illinois plan because it did not contain such a provision, but there were plenty of other opponents.

"It was very difficult to pass," says Daniel Biss, the state senator who sponsored and championed the bill. "When you talk about it to the public, no one can understand why you wouldn't try it. But the opponents fought hard to defeat it."

Key opposition came from state business associations and the American Council of Life Insurers (ACLI) in particular, which has been fighting Secure Choice plans around the country.

"We haven't been at the table helping to craft these plans," says John Mangan, ACLI's vice president of state relations. "Our industry has been in the retirement business for 100 years and we think we're doing a great job with employers who adopt their own plans."

Mangan concedes that the retirement savings gap is most acute in the very market Secure Choice plans aims to serve.

Mangan says there are better ways to close the gap, such as new low-cost, multiemployer 401(k) options for small businesses at the federal level, and at the state level, expanded savers credit and creation of certified networks of insurance providers who can provide low-cost payroll deduction options for employers.

These two approaches will be competing state-by-state over the next couple years.