The Trump Effect and Business: Retirement Plans
Without a mandate at the federal level, a handful of states have established or are in the process of establishing state-sponsored retirement plans. Small business influencer looks to Mike Savage, retirement compliance manager at Paychex, for more information.
More in this retirement series: College loans | HSAs | Fiduciary rules
Gene Marks: Hey, everybody. My name is Gene Marks. I write every day for the Washington Post and weekly for a bunch of other places online. I'm here with Mike Savage. Mike is the manager of retirement compliance at Paychex. Glad to have you here.
Mike Savage: I'm glad we're talking.
GM: This conversation is all about 401(k)s, IRAs, states, federal – there's been a big trend across the country of states offering IRAs or retirement plans to people and for companies to take advantage of. Do you see this trend continuing? And tell me a little bit about it.
MS: Yeah, we definitely do. We think, because of the absence of a mandate at the federal level, there is going to be more activity on the state level to sponsor private sector retirement plans.
GM: Like requiring companies to put money away for retirement? Or … ?
MS: That's a good question. So there's multiple states that have passed legislation to sponsor payroll deduct IRA offerings. So those are mandates. But there's also a few states now, and even a few localities like the city of Philadelphia, that are proposing and passing legislation to sponsor multiple employer plans, which is not a mandate at the plan sponsor level. It's a little different because they fall under ERISA. So the state can't really make them a mandate. But once a small business owner chooses to participate in a multiple employer plan, then it becomes a mandate for the participants to participate. But then they can opt out. So there's different nuances.
GM: So in the city of Philadelphia, I'm from Philadelphia, so that's where I'm like you, they could be requiring employers to do this. Is it the only place in the country that's doing this right now? Or is that happening in other parts of the country?
MS: Good question. There's nine states right now that have passed legislation to sponsor a program. There's 24 other states that have some form of proposed legislation that will probably – it depends on whether it's a blue or red state – whether they'll make it through. There's multiple cities. There's Philadelphia, there's Seattle. New York City has one, as well, that they're working on. And the spirit of these things is to expand coverage and to help people prepare for retirement.
GM: It's to put money away, and mandate – they're doing it. Are any of these states — and do you see a trend being where – I'm thinking about myself as an employer. Am I going to be required to contribute to these plans for my employees, as well? Or is it just a payroll deduction for the employee?
MS: So that's a good question. If you currently sponsor a workplace retirement program, these programs won't apply to you. This is really just to pull in small businesses that don't sponsor workplace retirement programs, to help the employees of those employers prepare for retirement. So those are the folks that will have to participate in these programs. And they're really interesting because they're all different. So that creates some significant challenges from an administrative standpoint, and then portability across states. And there's different nuances, they're going to make this extremely difficult.
But what the states are trying to do is have a positive impact on future budgets, because if people aren't prepared for retirement they'll be a drain on the state's budgets in their retirement years. So what we see is, and what's interesting, the state of Vermont just passed legislation to sponsor a multiple employer plan, which is an interesting program, and the fact that it's not a mandate at the planned sponsored level, probably will be tough for it to get adoption, unless there's significant awareness and great education in the state.
But what we really like about that is that speaks to that the state really is a proponent of a 401(k) arrangement. Which we agree. We think a 401(k) arrangement is far more beneficial to citizens in the United States than an IRA, because of the contribution limits are much greater. It's much better for small business owners from a tax strategy, or tax benefits. And then the contributions are much larger. But the small business owner can also contribute and they can also match on the contribution.
GM: It's funny. And I have to go on that as well, it amazes me. 401(k)s are relatively inexpensive to set up. I mean, they are literally hundreds of dollars, depending on the size of the company. You're right. Employees can put money away. Employers can match it, as well. It's a great benefit to provide. It's even like, if you're running a small business, you have employees that – you want to make sure they're putting stuff away for retirement. Because I've seen, with some clients, somebody retires and they don't have enough money. They're coming back to their employer asking for some extra help, or whatever. So really, it's a good thing. And again, there's still a large percentage of small business owners that don't participate in 401 – they don't offer it to their employees. Why do you think that is? It seems crazy to me.
MS: I think there's misconceptions about the cost associated with it. But I also think there's some issues with how they analyze the true impacts of not having a program. Because as you get an aging workforce, that becomes expensive, from whether it's productivity or workers’ compensation costs – different costs associated with having an aging workforce impacts succession planning, and retention or attraction of certain talent. If the top ranks of a certain organization might be filled with retirement-age folks offering a retirement program, and helping people prepare for retirement, is critical for just strategy and an overall business planning. That's critical.
GM: Yeah, kind of seems like a no-brainer. All right, Mike. That was great. So 401(k) plans, definitely something that every business regardless of size should be considering. And it seems like there really is quite a big trend for around the country of states and cities like the city of Philadelphia now offering their own sort of mandated retirement programs for businesses of all sizes. So it's yet another thing we need to keep an eye on. Mike, I appreciate your time.
MS: Yup, it's good to see you. Thanks.