Nearly 80 million full and part-time workers did not have access to a retirement savings vehicle through their employer before the COVID-19 pandemic. To help address this savings barrier, 46 states have enacted, studied or considered implementing a state-mandated retirement plan since 2012 — with 14 states and two cities currently running programs. Simply put, state-facilitated retirement plans are designed to help individuals save for their future regardless of occupation.
Most recently, rising health care costs and student loan debt have forced retirement saving to the backseat for many Americans. In addition to enabling individuals to better save for their retirement, these programs are intended to alleviate the national economic burden of widespread unpreparedness for retirement. In fact, the problem has become so vast that conversations surrounding expanded retirement access and security have made it to the federal level as well.
So what options do small businesses have when it comes to these mandates? Here are a few key differences between the savings vehicles offered through the state versus the private sector:
- A 401(k) allows participants to save more. Through the private sector, businesses can sponsor a 401(k), which has a contribution limit of $19,500 per year. That’s three times higher than that of an IRA, which is limited to $6,000 per year and is the typical vehicle offered through state-facilitated plans. In addition to increased saving power, private providers may offer the cost savings of flat-fee plans (as opposed to an asset-based fee structure of an IRA) — benefiting employees in the long term and ultimately easing pressure on the looming retirement crisis.
- Private plans offer tax advantages. By adopting a new 401(k) plan, employers are eligible for tax credits through the SECURE Act. Those eligible can receive credits up to $5,000 for the first three years the retirement plan is offered with an additional $500 credit just for enabling an auto-enrollment feature.
- More control for the employer. While the state-facilitated plans provide a one-size-fits-all approach, a privately offered 401(k) plan allows employers to customize the plan design for their unique business needs, including tax deductible employee contribution matches to better attract and retain talent, or profit-sharing provisions to maximize tax savings. Further, private plans give employers the ability to set eligibility rules and decide to include auto-enrollment and escalation features in a plan based on the business goals. These customizations can be critical to ensuring the overall adoption and success of these types of workplace benefits.
There are many factors to consider when selecting a retirement plan option for your business, and many business owners are still navigating the effects of COVID-19. One of the biggest challenges with state-facilitated retirement plans has been getting employers to pay attention to the mandates and react to the deadlines being enforced.
However, in California, the state has seen an impressive 70% of employers respond in some fashion to the ongoing deadlines in place for small businesses of a certain threshold to enact a state plan or utilize one from the private sector. In fact, 170,000 active accounts already have over $100 million in retirement savings through the state’s plan, CalSavers. June 30, 2022 marks the deadline for small businesses with more than 5 employees to comply, meaning even more participants will be enrolled in some form of retirement savings vehicle.
State-mandated-retirement plans are overall a positive initiative to improving America’s retirement savings crisis. As a business owner, it’s important to thoroughly research your options before selecting the best route for you, your business model and your employees.
Ashvin Prakash, Director of Product Development at Ubiquity Retirement + Savings, oversees the strategic roadmap for Ubiquity’s innovative, cost-effective retirement solutions for small businesses across the country. With over 15 years of financial services experience, Ashvin is responsible for identifying, designing and launching new products to empower small businesses and their employees to create a more secure financial future.