The New York Secure Choice Alternative: A Ubiquity Small Business 401(k)

Studies show that American workers need to save more for retirement. A 2020 survey found that 45% of American households have no retirement assets. According to Stanford researchers, only half of the people who have invested in their retirements feel comfortable and adequately prepared.

Workers are 15x more likely to save for retirement if they are able to do so through their job, Pew Research shows. Thanks to state retirement mandates – like the one New York just passed – 20 million of the 57 million people who lack retirement plans through their employers now have access to this type of long-term savings.

The latest move in New York is a conversion of previously-passed legislation that established a voluntary IRA plan for the private sector, but was never implemented.

A 401(k) solution provides employers with the opportunity to maximize their contributions and tax savings while helping their employees save for the future. With a 401(k) plan you can contribute 3 times more than with an IRA:

<sup>1.  This limit is subject to cost-of-living increases for later years (for prior years, refer to this cost-of–living adjustment table.)
2. Available to eligible employers who have less than 100 employees who received at least $5,000 in compensation in the previous year, had at least one participant who was a non-highly compensated employee, and in the last 3-years did not contribute to a benefit plan for your employees through a plan sponsored by you or a member of a controlled group that includes you.</sup>

New York City recently passed an auto-IRA program of its own in May 2021. Out of 3.5 million private-sector workers in NYC, only 41 percent have access to an employer-sponsored retirement plan. This is lower than the 53 percent national average – but, still, 40 percent of New Yorkers nearing retirement have less than $10,000 in savings.

• The city retirement security board has up to two years after the law’s start date of August 9, 2021, to formally implement and start the program.
• The state’s plan sets the default employee contribution rate to 3%, up to a maximum annual contribution of $6,000 for those under 50 or $7,000 for those over 50.
• Employees may adjust the contribution rate higher or lower, or opt out of the auto-IRA, at any time.
• Unlike the typical employer-sponsored plan, the state plan is fully portable and requires no rollover when changing jobs. Employers are not required to contribute on behalf of employees.

Employers are subject to penalties for violation of the law, including a $250 fine for the first violation, $500 for a second violation within two years, and $1,000 for subsequent violations within that two-year window.

All employers affected by the NY State mandate will be required to have a payroll deposit arrangement that allows each employee (ages 18+) to participate in the program no later than nine months after the administrative board formally opens program enrollment. Payroll deductions will begin 30 days after an employee’s enrollment.

Employers must automatically enroll any employees who have not opted out at a 3% contribution rate, unless otherwise directed by the employee. Contributions can be higher or lower but may not exceed $6,000 per year. An additional $1,000 may be contributed by savers age 50 and older who are nearing retirement. The board may decide to auto-escalate contribution rates at any time.

The board will choose an investment lineup that encompasses a range of risk and return opportunities. Options, as selected by the board, may include:

• Target date lifecycle fund
• Conservative principal protection fund
• Growth fund
• Secure return fund
• Annuity fund

Enrollees may select from this menu of investment choices or accept the default option. The program will be chaired by the state comptroller.

The state will lend the program startup funds to cover administrative costs, which will eventually get repaid from total program funds. Enrollees will pay administrative fees based on a pro-rata basis.

The NY state retirement program will use only Roth IRAs, meaning that taxes are paid up-front on amounts contributed, but are not taxed when taken out in retirement years. The board (not employers) will be held to ERISA-similar fiduciary standards.

Participating employers must pass out information created by the board to promote the plan. Employers with existing retirement plans are prohibited from terminating their programs for the sole purpose of participating in the state option.