State-mandated retirement plans are rolling out across the country. Learn what this means for your business and how to comply with the legislation. These programs require employers to offer automatic enrollment in a payroll-deducted IRA for employees. Businesses that don’t participate face state penalties. The good news is these programs have unique benefits for employers and workers.
Increases Savings Rates
As more states adopt state auto-IRA plans, they’re gaining momentum as a way to close the retirement access gap. According to Georgetown University’s Center for Retirement Initiatives research, the 19 active programs have helped workers save nearly $840 million. These state-facilitated programs level the playing field, making it possible for businesses to offer retirement plans no matter their industry, how big or small they are, or how many other employers their workers may work for. A new study finds that in Colorado, where a state mandate is slated to take effect next year, companies have increased their participation rates in 401(k)s and other private retirement plans since introducing a similar state-sponsored plan. Although some feared that these mandates would compel employers with existing retirement plans to drop them in favor of these state-sponsored programs, this does not appear to be the case. Instead, state-mandated retirement accounts encourage businesses without retirement plans to adopt them, which helps their employees save more for the future. This is especially true for low and moderate-income earners, who have a more challenging time keeping independent because of the need for employer-sponsored options. As a result, these programs are helping to close the savings gap that could otherwise lead to costly social spending in the future.
Boosts Employee Engagement
A recent study showed that employees are more likely to save for retirement when their employer offers a plan. In addition, research also suggests that workers are more likely to stay at a job that offers retirement benefits. This means that state-mandated retirement accounts can boost employee engagement by ensuring more employees can access an effective savings program. Most states have established programs that mandate employers of a specific size to offer a state-facilitated retirement savings plan. These programs are often called “auto-IRA” plans, and they typically involve payroll deductions starting at around 3% or 5%. Workers can opt out of the program or change their contribution rate, and some states will even automatically bump up contributions by a certain amount every year. The state-mandated retirement savings programs are generally cheaper and simpler to administer than private market options. Still, they may not always be the right fit for a small business’s unique circumstances. Nevertheless, the landscape of state-mandated retirement accounts is rapidly changing, and SMB owners must keep up with current developments. With the number of states with such programs continuing to grow and a national plan likely in the works, it’s worth considering whether or not your business is ready for a change.
Increases Employer’s Bottom Line
With the growing number of Americans without access to a retirement savings plan, state governments are stepping in to help. Over the past ten years, more than half of the states have introduced legislation to implement or study options for a state-facilitated retirement savings program. The goal is to help workers who need to save through a workplace savings plan. These new programs, commonly known as auto-IRAs, simplify retirement savings by automatically enrolling employees and allowing them to increase their contributions each year. State-administered retirement savings plans are typically designed to provide an alternative for private sector workers whose employers do not offer a traditional employer-sponsored retirement plan, such as 401(k)s or 403(b)s. The state-run plans typically include salary deductions that are automatic and adjustable, and they usually allow participants to contribute up to specific maximum amounts. Depending on the specifics of each state’s program, it may also be possible for employees to receive matching or profit-sharing contributions from their employers. Still, these are generally limited and prohibited in most cases.
Boosts Employee Morale
With a growing focus on reducing the retirement gap, state and municipal programs are stepping in to facilitate nest egg building for workers whose employers don’t offer a workplace plan. These state-run “auto-IRA” programs are typically governed by a board that designs and oversees the program, creates rules, selects plan providers, and chooses the investment menu. While these programs can be cost-effective (usually don’t have any upfront or set-up costs and minimal administrative requirements), they limit the maximum employee contribution to just $6,500 a year for 2023 ($7,500 for employees age 50 or older). Some states also provide more options for small business owners, such as a voluntary payroll deduction IRA marketplace or a voluntary open multiple employer plan (MEP). An MEP is when a group of unrelated employers without workplace plans pool their administrative and fiduciary responsibilities in one 401(k) group plan.
As a result, the administrative burdens are reduced on employers. However, the responsibilities still fall on the employer, so business owners must familiarize themselves with their state’s specific rules and regulations before deciding. Otherwise, businesses could be subject to fines if they don’t comply.
