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55 million American workers— more than 40% of full-time private-sector employees— don’t have access to a retirement savings plan.
In an age where pensions are rapidly disappearing and the Social Security system is deeply strained, this gap in coverage jeopardizes the financial futures of a huge chunk of the country, and it disproportionally affects workers at small businesses. According to the Pew Charitable Trust, only 22% of employees at workplaces with 10 or fewer workers had access to a retirement plan, in comparison to 74% of employees at companies with over 500 employees.
Traditionally, 401k plans have been designed for the budgets and administrative load of large businesses. These complicated and expensive plans provided by the traditional retirement marketplace overlooked the small business plan market entirely.
In recent years, web-based 401k plans that are affordable to businesses of all shapes and sizes have begun to spring up. Some of these plans have low monthly fees and no asset fees, and employers have the option to split costs with their employees, much like group health insurance plans.
Still, these pervasive 401k myths exist. According to the 2018 Millennium Trust Small Business Retirement Survey, 45% of business owners not offering a retirement plan had not even researched looking into one. The assumption by these business owners was often that plans were too expensive or that their employees didn’t really care about having access to one.
Maximum employee annual contribution amount
Additional annual employer contribution limit
Yes, up to an additional $37,000
Flat fees that don’t increase with your account balance
No, asset-based fees
Yes, flat fees
$500 credit to offset setup costs
Flexible vesting schedules
Investment guidance based on individual risk tolerance
In an attempt to help the workforce save for retirement, state governments have stepped up to the plate. Since 2012, 30 states have introduced some form of retirement legislation.
So far, 10 states have enacted a government-sponsored retirement savings program: California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington. But not everyone is tackling the issue of the retirement crisis the same way. The intention of the state retirement mandates is to level the playing field so that everyone has a more equal footing.
While all the state legislation focuses on retirement readiness and financial security, how each state goes about it can vary.
In California, Oregon, Illinois, Maryland, Connecticut, New Jersey, and the city of Seattle, governments are attempting to close the savings gap by mandating a retirement savings vehicle for private-sector employees who do not have access to an employer-sponsored plan.
Businesses in these states have two options: offer an eligible retirement plan from a private provider or enroll in the state run retirement option. Once a business is enrolled, employees who do not opt-out of the program automatically will be enrolled in a payroll deduct Roth individual retirement account, aka Roth IRA.
In these state-run auto-IRAs, retirement contributions come directly out of worker’s paychecks. These employees are able to save up to the IRA maximum contribution limit of $6,000 per year (with an additional $1000 in catch-up contributions if they are 50 or older). The default contribution rate varies from state to state but usually starts at a default rate of between 3-5% of the employee’s income withheld from each paycheck and deposited into the account. Employees have the right to adjust or cancel that contribution at any time.
While saving for retirement is always the end goal, not all savings vehicles are created equally. Across the board, 401k plans allow both business owners and their employees to contribute more each year towards their future, while gaining greater tax benefits than saving in an IRA.
New York’s program works similarly to the mandatory, state-sponsored IRA plans above. The New York Secure Choice Savings Program, aimed to launch in April 2020, provides New York business owners who don’t currently offer a retirement plan the option to offer an auto-IRA, but does not set it as a requirement.
Vermont and Massachusetts have chosen through a voluntary multiple employer plan system (also known as an MEP). MEPs allow businesses to band together and offer a 401k plan to their employees with less of the financial, administrative, and compliance burden of running their own plans.
The state of Washington a different route in helping their citizens save for the future. It has set up retirement marketplaces designed to bring together business owners and private retirement plan providers. The marketplace offers a variety of IRA, 401k, and profit-sharing products for employers to choose from.
Want to know more about your state’s retirement plan versus Ubiquity? We’ve got experts that have your back. Call us today at 855.912.6904 or email us at firstname.lastname@example.org