State Plans and What They Mean to Retirement Savings

The results of numerous online surveys agree: The number one thing people worry about is retirement savings, yet it’s reported that 1 in 3 workers don’t have any money set aside for retirement.

Taking a cue from this statistic, and understanding that everyone benefits from making savings a priority, some states are proactively investing in the economic futures of their citizenry by introducing laws that provide state-run retirement savings initiatives. Essentially, once the legislation is passed, it requires states to offer some type of savings vehicle and for employers with a minimum number of employees (that number varies by state) to provide a retirement savings program. 

Currently, eight states have passed state plan legislation: California, Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts and Washington. The mandates are structured around, generally speaking, a required 3% employee auto-deposit into a retirement savings account that will occur unless the employee opts out. The goal is part financial, of course, but also part educational. As plans begin to grow for traditionally low savers who may not otherwise be versed in retirement, they are immersed in a savings culture and actively engage in it for their future. Similarly, as collective retirement savings are sustained over a period of time and employee numbers grow, smaller employers become more attractive for servicing within the financial industry.

State plans have certain upsides for small employers, specifically that it costs employers little or nothing – in time or money – to set up. Employers simply coordinate payroll deductions. But, there’s cost and then there’s value. Many state plans offer only one option – a Roth IRA – small employers and their employees could benefit more by exploring other saving vehicles that fit within the mandate.   

Roth IRAs have income limitations that could impede a business owner or highly compensated employees from making contributions to their best savings advantage. State plans could mean less money in employees’ savings – maximum deferral amounts in a state plan are generally four times less than amounts allowed through a traditional retirement plan and employer matching is not possible. In order to maximize their own savings efforts, owners and highly compensated employees would have to have additional retirement accounts outside of the state plan.

If employers desire to maximize their contribution or want to offer incentives like matching contributions, they could offer a 401(k) plan, like CoPilot, a complete managed retirement savings service that helps employees plan a comfortable retirement. This option comes with an upfront cost to the employer, but there is added value. The employer fees can be tax deductible, and employers and business owners or highly compensated employees can maximize their contribution. 

The coverage choice ultimately remains with the employer, but it boils down to this: most state plans are mandates – meaning employers are told exactly what to do within the specific parameters of an IRA, or employers can choose a 401(k) plan on their own that both serves employees and complies with state requirements. 

Let’s start the conversation about the savings plan types and their fit in your future – and the future of your employees – with a needs assessment. Contact us online or call 1-800-236-7400 (option 1) today to learn more.

Rob Bishop - Sr. Manager of Corporate Accounts and Government Savings - rcbishop@pai.com - 800-236-7400 X3341

Rob is a subject matter expert on 401(k), retirement savings, state mandates, broker dealers and the overall competitive landscape.