State-mandated plans require businesses to offer a specific type of retirement plan that the state or third party directly runs. Unlike employer-sponsored 401(k)s, these plans may offer employees limited investment and contribution options. Some states use legislatively established commissions or task forces to review the proposed program’s benefits. This approach can help reduce reviewer bias.
Auto-IRAs
State-run auto-IRA programs, which combine payroll deduction and automated retirement investment for those lacking access to an employer plan, have been a key part of state efforts to close the coverage gap. The programs, established in California, Oregon, Illinois, and most recently in New York City, allow workers to automatically save a set percentage of their pay. Individuals can raise or lower the savings rate and opt-out at any time. The programs, run by an administration committee that oversees target-date funds and bonds, make it easy for individuals to invest in their future without researching the market or choosing a fund provider.
Studies of California, Oregon, and Illinois’ programs suggest that the programs have increased the likelihood that workers will work for firms with an in-house plan and increased the number of people saving enough to cover their basic needs in retirement. For providers like Vestwell and Ascensus, which provide 401(k) startup offerings, the auto-IRA programs have been a source of business. A federal proposal to support similar plans could help increase the number of private options for employers who don’t offer a plan by encouraging small businesses to band together to form multiple-employer plans that can share administrative costs.
Tax-Free Savings
State-mandated retirement plans are gaining momentum across the U.S. Many states have passed legislation requiring or planning to implement state-run retirement programs for private-sector workers. These programs address the coverage gap between workers with access to employer-sponsored 401(k) plans and those without.
State plans are typically structured as auto-IRAs that automatically enroll employees through payroll deduction. Employee contributions are usually made in Roth individual retirement accounts (IRAs). Earnings in these accounts grow tax-free until withdrawn in retirement. Most state-mandated retirement programs have lower contribution limits than typical employer-sponsored 401(k) plans and limit or prohibit employer matching or profit-sharing contributions. While state-run retirement programs have pros and cons, they provide SMB owners with a simple solution that requires no setup costs or administrative burden. They also offer minimal investment options and contribution thresholds that may not meet the needs of some employees.
Employer Matching
State mandates typically require that employers offer a payroll-deducted retirement savings plan (usually an IRA) and automatically enroll all eligible employees. Employees can decline the plan but are often incentivized to participate through an employer match or other benefits. Generally, the program is set up and run by the state or a third-party provider.
Employers can choose how to provide matching contributions if the match formula is at least 3% of employees’ elective deferrals. Many companies that provide a match offer at least a dollar-for-dollar contribution for the first 4% of an employee’s deferrals, while others may offer less than 100% matches or make contributions in addition to matching gifts. Qualifying employers don’t have to choose the state program if they already offer an alternative qualified retirement plan, such as a 401(k). Still, they have to prove they have a plan to avoid penalties for non-compliance. Some employers opt for a private multiemployer plan such as a PEO or pooled employer 401(k) to help them meet their compliance obligations.
Flexibility
A state-mandated plan is one in which the government establishes and runs an individual retirement account (IRA) on behalf of employees or hands it over to third parties. It then requires employers to offer the state-directed option and automatically enroll employees who choose not to opt-out. Employers of a certain size who don’t provide a qualified alternative are subject to fines.
Repeated studies show that auto-enrollment boosts savings significantly. However, a state-mandated plan typically only allows for low maximum contributions and offers little flexibility regarding employer matching or profit-sharing. While the simplicity of a state-mandated plan may be an attractive option for small businesses, some alternatives can offer added flexibility and customization for employers, such as a 401(k) plan through a PEO or a multiple employer 401(k) plan with a financial advisor.
Compliance
In recent years, states have required companies to offer employees access to a state-run retirement savings plan. Known as state-mandated plans, they are designed to boost retirement savings for American households by making saving easy. A company that complies with government regulations will meet all the requirements and will be able to operate safely and without worry. Companies often hire compliance officers to ensure that they are following the rules. In the case of state-mandated retirement plans, employers must offer their employees access to a specific type of individual retirement account (IRA). These are typically run by the state or a third party chosen by the state and require that employees be auto-enrolled with the option to decline. Those who do not offer a state-mandated plan will face fines and penalties.
