What a State-Run Retirement Plan Would Mean to Your Company
There are many ways to save for retirement but most Americans aren’t doing it. Many states are considering legislation that could make retirement savings easier.
Americans are not saving enough for retirement. According to Northwestern Mutual's 2019 Planning and Progress Study, 15 percent of Americans have no retirement savings. Seventeen percent only have between $1 and $75,000 — which falls short of the $1 million some experts recommend.
Some state legislators think they have the solution and are focusing on employers.
More than 30 states have considered legislation that would establish a state-run retirement plan. Although only 10 states have passed legislation that would provide for some form of state-facilitated or mandated retirement program for private companies that do not sponsor their own qualified retirement plans. Those states are California, Oregon, Illinois, Maryland, Connecticut, New Jersey, New York, Washington, Vermont and Massachusetts. Of those 10 state programs, only Illinois, Maryland and Oregon are actively operating at this time. California's CalSavers program is scheduled to start in 2020.
California employers who have 100 employees or more must be in compliance with the program by June 30, 2020. The deadline for employers with five or more employees is June 30, 2022.
All four states — California, Illinois, Maryland and Oregon — require companies with certain minimum numbers of employees (between 1 and 25, depending on the state) that don’t have employer-sponsored retirement plans to:
- Automatically enroll their employees in a retirement savings program.
- Deduct a set amount from each employee's check (generally 5 percent of compensation). However, employees can opt out of the program.
- Transfer those salary deferrals to a Roth IRA program set up by the state for this purpose.
Employers who fail to comply with these state-mandated programs could be subject to penalties.
Observers estimate that the CalSavers program will make retirement plans available to an additional 7.5 million California employees.
Some Concerns
However, the results have not been quite what participants expected. Oregon's plan, OregonSaves, enrolled more than 50,000 employee participants in 2018, but the average account balance was less than $500, well below the national average 401(k) account balance of $85,000, according to Cerulli Associates, a research and consulting firm.
There are several key differences between these state-sponsored and employer-sponsored plans.
For instance, a state-sponsored plan uses one investment firm, while an employer-sponsored 401(k) utilizes a wide range of investment firms which offer several investment options at various risk levels.
Another key difference is that state-sponsored retirement plans carry a $6,000 annual salary deferral limit compared to the 2019 $19,000 annual salary deferral limit (or $25,000 if age 50 or over) of employer-sponsored 401(k)s and $13,000 ($16,000 if age 50 or over) for SIMPLE IRAs.
Most state-sponsored retirement plans use after-tax dollars, so employees will not get to use the pre-tax benefit. Also, state-sponsored plans do not have an employer-matching contribution feature, which can quickly boost employees’ savings.
Finally, employers who choose to offer a state program will be responsible for performing certain administrative tasks, whereas with a 401(k) plan, that work usually is handled by a plan administrator.
NAIFA, an organization representing insurance and financial advisors, argues that access to retirement plans is not the problem. They say that the marketplace already offers consumers a robust variety of retirement options. Instead of states spending money on programs, NAIFA would rather states analyze why people aren't saving enough before enacting solutions.
Still, government's interest in these types of plans continues. The Senate is now reviewing proposed Secure Act legislation, which would make it easier for small businesses to collaborate to offer 401(k) plans. That legislation is currently awaiting consideration by the Senate.
If you operate in a state which offers a state plan and are trying to decide whether an employer-sponsored plan would be a better fit for your employees, contact us to determine what plan is best for you.
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