State-sponsored Retirement Plans: Can They Help More People Save?
Saving for retirement is easier said than done. Everyone has the best intentions, but many fall short of their goals.
According to the U.S. Government Accountability Office, 48 percent of households aged 55 and over have no money stocked away in a 401(k)-style defined contribution plan or IRA.
Furthermore, the Employee Benefit Research Institute notes the following:
40.6 percent of all U.S. households where the head of the household is between 35 and 64, inclusive, is projected to run short of money in retirement. That is down by 1.7 percentage points vs. 2014.
With statistics like these circulating, it’s no wonder why many states are looking to remedy the problem by providing state-sponsored retirement plans to small businesses.
To date, ten states have launched pilot programs or enacted legislation to implement a state-sponsored retirement plan. This is in addition to many others that have legislation pending, along with discussion in Washington D.C. about federally mandating retirement plans for employers with 10+ employees.
The primary goal of a state-sponsored retirement plan is to fill gaps in retirement savings by providing employees access to a simple, low-cost savings plan.
Note: while employees are not required to partake in a state-sponsored retirement plan (if available), many states are mandating businesses to offer some type of plan.
Here are some general details associated with most state-sponsored retirement plans:
- Most state-sponsored retirement plans are designed as Roth IRAs
- May be mandated for companies that don’t currently offer a retirement plan
- Use of established firms to help employees save through low-risk investments
- Allow employees to save through payroll deductions
- Increase retirement savings for people with limited savings options
Now, let’s examine three of the most well-known state-sponsored plans:
CalSavers Retirement Savings Plan
The California CalSavers retirement savings plan program is one of the most advanced, which officially launched in July 2019.
The State of California Employment Development Department notes that many employers are required to provide some form of retirement savings plan:
Employers with five or more employees will be required to either provide a retirement plan for their workers or register for CalSavers and facilitate employees’ contributions to Individual Retirement Accounts. Deadlines for compliance vary according to the size of the business.
Some of the key features of the program include:
- Use of Roth IRAs and traditional IRAs
- Automatic enrollment for employees with a default savings rate of five percent of gross pay (employees can alter this)
- Ability for employees to save through payroll contributions
Illinois Secure Choice
Similar in many ways to CalSavers, the official Illinois Secure Choice Savings Program website defines its program as follows:
In early 2018, Illinois launched a pilot for Illinois Secure Choice, a state-sponsored retirement program. This new, simple way to save for retirement provides a Roth Individual Retirement Arrangement (IRA) to those employees who do not have access to a retirement savings plan through work. Illinois Secure Choice is estimated to help 1.2 million workers in Illinois save for their future retirement.Employers with 25+ employees who do not currently offer a retirement plan are required to participate in the Illiniois Secur Choice Savings Plan.
- Use of Roth IRAs
- Default savings rate of five percent of gross pay (employees can alter this)
- Auto-enrolls participants in payroll contributions, with the ability to opt out
- Access to investments overseen by the Illinois Secure Choice Savings Board
- Variety of investment options
OregonSaves is designed with employees in mind, with features including:
- Choose between standard savings elections and customizing your plan
- Portable retirement savings accounts that follow you from company to company
- Top of the line customer support
Unlike many states, Oregon has mandated that all employers offer employees some form of retirement plan. The OregonSaves website adds:
Oregon employers are required to facilitate OregonSaves if they don’t offer an employer-sponsored retirement plan. All eligible employers can join at any time prior to their registration deadline.
Even companies with four or fewer employees are required to offer a retire plan.
A growing number of states have come to realize the challenges its residents face in regards to retirement savings.
With the help of state-sponsored retirement plans, more employees than ever will find it easier to save the money they need to live well in retirement.