By Allison Brecher, General Counsel, Vestwell
We’re all too aware of the looming retirement crisis. Almost 25% of adults in the United States lack any retirement savings. In response, a number of states have decided to take matters into their own hands by enacting legislation that requires employees to participate in their state-sponsored retirement program. So, what does this mean for business owners not currently offering a plan?
For businesses operating in a state where legislation has been proposed, it’s very likely that you’ll have to make some changes in the not-so-distant future. Some state plans come with penalties for not enrolling, while others offer appealing incentives for getting involved. However, the real question may not be whether you want to offer a state-sponsored plan or not, but rather, whether a state-sponsored plan is the right option for you.
Most state-sponsored plans are designated as Roth individual retirement accounts (IRAs), using investments chosen by the state, and are generally low-cost, so there are absolutely benefits. However, there are also benefits to creating a customized plan that works for you and your employees. Issuing your own plan allows you to:
- select your own investments to include the right fund variety and offer user-friendly models like target-date funds;
- create your own plan design so you have more control over things like company matching and eligibility rules;
- derive significantly greater tax benefits because a 401(k) plan allows deductions of pre-tax earnings of up to $19,500 whereas an IRA only permits deductions of up to $6,000 in earnings;
- borrow against your plan in times of emergency; and
- keep costs equally low thanks to new entrants and advanced technology that eliminates overhead.
So while state-sponsored plans are getting the conversation started, it’s important to look at your bigger picture strategy and determining the best short- and long-term decisions to support your business. To better understand the urgency behind any retirement plan decision, it’s worth digging deeper into the specific requirements of your state.
But regardless of what state you’re in, there are many perks to offering a company-sponsored retirement plan such as tax incentives, recruitment and retention benefits, and investing in your own future. And thanks to new entrants and advanced technology, many traditional inefficiencies and excess fees have been eliminated, keeping costs down.
It’s great that states are putting a real emphasis on the retirement crisis and stepping in to help. But at the end of the day, this is about setting your employees – and yourself – up for retirement security. So look at the current proposals in your jurisdiction, think about what you’re trying to accomplish at the end of the day, and determine what will offer the greatest value for you and your team. Everyone deserves retirement security and you can help.