8 States Establishing State-Funded Retirement Plans
A financial crisis looms for older Americans, as about 55 million U.S. workers lack access to an employer-based retirement savings plan. A disheartening 69 percent have less than $1,000 in savings. About one-third of U.S. workers wonder whether they'll be able to cover basic living costs when they retire. Only six in 10 say they have saved for retirement.
The increase of impoverished Americans has spurred some state legislatures into action. California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Washington state have established or are in the process of establishing retirement plans for private-sector employees who don't have a savings program at work.
Plans mandated for eligible companies
- Are usually designed as Roth individual retirement accounts (IRAs);
- Are mandated for businesses of a certain size if they don't offer a retirement plan for their employees;
- Use investment firms and low-risk funds chosen by the state;
- Require affected companies to set aside a percentage of every worker's salary each month for the retirement fund — usually 3 percent;
- Allow workers to opt out of contributing via payroll deduction (although the employer makes monthly contributions on each employee's behalf);
- Lower investment and administrative fees; and
- Improve retirement for people with limited savings options.
Plans in various stages of implementation
The eight states sponsoring retirement plans are in various stages of application.
Secure Choice will be phased in over three years, likely taking effect in 2019. Businesses with five or more workers that don't provide a retirement plan must begin to offer one or provide their employees access to Secure Choice. Businesses with more than 100 staff members will need to offer a retirement plan within 12 months of Secure Choice's start. Employers with more than 50 employees must offer a retirement plan within 24 months of Secure Choice's launch; employers with more than 5 workers will need to provide a retirement plan within 36 months.
The state established the Connecticut Retirement Security Authority to develop and administer the Connecticut Retirement Security Program, set to begin operating in 2018. The plan will require all Connecticut businesses of five or more employees with no pension or 401(k) plan option to participate. It will be voluntary for employees, who will be automatically enrolled and have 3 percent of their pay directed into the Roth IRA. Employers don't have to match contributions. Employees will be able to change their contribution rate.
Secure Choice, originally set to launch June 1, 2017, is now scheduled for a gradual phase-in, beginning with a pilot program in 2018. Employers with 25 or more employees will have workers automatically enrolled unless they decide to offer another qualified retirement savings plan. Businesses don't contribute to employees' accounts, have no administrative or managerial duties, and don't incur any costs.
The Old Line State will implement a state-run retirement plan in 2018. Employers won't be required to contribute to employees' accounts. As an incentive to businesses to allow workers to enroll, Maryland is waiving the annual corporate filing fee of $300. The law exempts Maryland companies that do their payroll by hand rather than electronically.
Massachusetts has a retirement program for nonprofit workers, limited to organizations with fewer than 20 employees. Legislators are weighing the practicality of implementing a plan for private-sector employees.
The Garden State is developing a retirement plan marketplace to make it easier for small companies to choose a tax-deferred savings program for employees. Employers can decide whether to participate. The program will offer an IRA funded with payroll deductions, and a SIMPLE IRA, which helps small businesses contribute toward their employees' retirement. Employees may choose to make payroll deductions, and the employer must make either matching or non-elective contributions. New Jersey's plan will be available to businesses with 100 or fewer staff.
OregonSaves will launch in July 2017 to a small pilot group of businesses. It will then roll out in phases, starting in 2018, for businesses with 100 or more employees. The plan will be established over several years, with workers at smaller firms added at later dates. The standard contribution rate is 5 percent, but employees can choose to save at other rates in 1-percent increments. In the future, contributions will automatically increase by 1 percent per year up to 10 percent, unless employees opt out of the increase.
Like New Jersey, Washington state is establishing an online marketplace where qualified financial services firms will offer low-cost retirement savings plans to businesses with fewer than 100 employees, including sole proprietors and self-employed individuals. The state expects the marketplace to go live sometime in 2017.
Lawmakers in other states may be considering state-funded retirement plans. Check your state government website and Paychex.com to stay up to date on this issue.