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Current Status of State Mandated Retirement Savings Plans

When it comes to America’s average level of retirement readiness, the results are in—and they don’t look good. The Aegon Center for Longevity and Retirement reports that relatively little progress has been made in retirement readiness among today’s workforce in the last seven years [1], and even worse, the National Foundation for Credit Counseling found that retiring without having enough money set aside is the top financial worry among American workers, yet more than one in four adults don’t save any portion of their household income for retirement [2].

To help proactively defend workers from joining in on these negative statistics, some states are investing in the economic futures of their citizenry by implementing laws to provide state-run retirement savings vehicles, like an IRA. Essentially, once the legislation goes through, employers with a minimum number of employees (the exact number varies by state) will be required to offer up some type of savings vehicle to employees. And while the minimum number of employees may vary, the main message holds steady: it is vitally important for employees to have access of a retirement savings vehicle to protect their financial future.

Which states currently have retirement plan mandates?

Currently, eleven retirement savings programs have been enacted across the country: in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, Washington, and the city of Seattle. The details of the mandates vary by state, with each program implementing its own regulations on the type of plan, number of employees needed, implementation deadlines, and the like.

What are the benefits of state-mandated retirement plans?

While the statistics surrounding overall retirement readiness among Americans were alarming enough on their own, things got even worse when the conversation turned small business-specific. Small employers (with five to 24 employees) are significantly less likely—91 percent less likely, to be exact—to offer a sponsored retirement plan than slightly larger businesses with 100 to 500 employees [3]. Clearly, the need for some type of plan regulation is there.

Plus, state plans offer certain upsides for small employers. Offering a state mandated retirement plan costs the employer little to nothing to set up. That being said, the state-run plan may not be the most valuable option for small employers—as Roth IRAs, the only option offered by many state plans, may not benefit employees as much as other savings vehicles that would also comply with the mandate.

What are the downsides of state-mandated Roth IRAs?

There are a variety of potential downsides small employers will want to consider when approaching state mandated Roth IRA savings plans. For starters, Roth IRAs have income limitations, which could impede a business owner or highly compensated employees from making contributions to their best savings advantage. Additionally, state plans generally equate to less money employees can save because maximum deferral amounts in a state plan can be four times lower than what is allowed through a traditional retirement plan, like a 401(k). Plus, most state plans don’t allow for employer matching contributions, further lowering savings advantages.

If employers desire to maximize their contribution or want to offer incentives like matching contributions, they would have to implement additional retirement accounts outside of the state plan, like a 401(k). This option comes with an upfront cost to the employer, but there is a higher degree of added value:

  • •  Employer fees can be tax deductible
  • •  Matching contributions are allowed
  • •  Highest savings potential of any retirement savings vehicle
  • •  Mandate-compliant
  • •  Payroll integration available

While the plan choice ultimately remains with the employer, it boils down to this: most state mandated plans are exactly that: mandates—meaning employers are told exactly what to do within the specific parameters of an IRA. Or, employers can instead choose a 401(k) plan that both serves employees and complies with state requirements. To learn more about the biggest differences between state-mandated IRAs and 401(k) plans, and to help you determine which makes the most sense for your small business, check out our free 401(k) vs. IRA pdf.

Let’s start the conversation about the different types of savings plans and how they fit into your future (and the future of your employees). To learn more, contact us today.

[1] https://www.aegon.com/contentassets/54778b6350424936867e429daf378297/retirement-readiness-survey-2018.pdf

[2] https://nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf

[3] http://www.pewtrusts.org/~/media/assets/2017/09/barriers_to_worker_savings_report_draft.pdf