State Mandated Retirement Plans Vs. Employer Sponsored 401k Plans

If you’re thinking about offering retirement benefits to elevate your benefits package and boost recruitment and retention, you can choose from a lot of options, from traditional and Roth 401(k)s to safe harbor and SIMPLE. But your choices don’t necessarily end there. In some states, you also have to pick between state mandated retirement plans and employer sponsored.

We know there’s a lot to consider when thinking about implementing a retirement plan, especially if you operate in a state that requires one. To help you understand the best way to offer this benefit to your employees, here we’ll explain where state mandated retirement programs have been enacted, the differences between state mandated and employer sponsored 401ks, and the pros and cons of each.

After reading this, you’ll be able to compare state versus employer sponsored plans to decide which is the best approach for your business.

What is a state mandated retirement plan?

A state mandated retirement plan is a program that requires businesses of a certain size to offer either a traditional or Roth individual retirement account (IRA) program to employees who would not otherwise have access to an employer sponsored plan.

These plans are auto-IRAs, meaning employers must automatically enroll workers through payroll deduction starting around 3% or 5%, although employees have the option to opt out or change their contribution level. Some states, like California, also have an auto-increase feature that bumps up an employee’s savings rate each year.

The idea behind the plans is to boost much-needed savings for these workers, since individuals are 15 times more likely to save for retirement if they can do so through a workplace plan, according to AARP.

What are the states with mandatory retirement plans?

There has been a lot of legislative activity around state mandated retirement plans. Currently, 10 states have enacted programs, but there are several others where auto-IRAs will soon be required.

Here’s a complete list of states – or in some cases cities – that currently mandate retirement plans for private sector workers or will shortly. (This list does not include states with voluntary programs.) Keep in mind that if you already offer a workplace retirement plan or decide to provide one on your own instead, you can apply for an exemption from your state’s requirement.

California: CalSavers offers a traditional and Roth IRA. The program is required for employers with more than 50 employees, unless you have an exemption.
Colorado: The Colorado Secure Savings Program is set to roll out in early 2023 for employers with at least five workers.
Connecticut: The program, called MyCTSavings, is for businesses with five or more workers.
Illinois: The deadline for registering with the state’s program, Illinois Secure Choice, has passed for companies with 25+ employees. It’s November 1, 2022, for those with 16-24 workers, and is November 1, 2023, for companies with 5-15 employees.
Maine: Phased-in implementation of the state’s auto-IRA, called the Maine Retirement Savings Program, begins April 1, 2023.
Maryland: The state will pilot launch its program, MarylandSaves, in June 2022.
New Jersey: New Jersey’s program, the Secure Choice Savings Program, took effect March 28, 2022, and affects all businesses with at least 25 workers that have been in business at least two years.
New York: The state previously had a voluntary IRA program, the Secure Choice Savings Program, but will now require New York employers with at least 10 employees to offer a qualified retirement plan or join the state-run IRA program effective October 21, 2022.
New York City: Two laws effective August 9, 2021, will require private employers with five or more employees to enroll employees in their own plan or a city-managed retirement savings plan. The board overseeing the program has up to two years to formalize details and set a commencement date.
Oregon: OregonSaves has been in effect since it’s pilot program first launched July 1, 2017. By late 2022, every company in Oregon with a least one employee will be required to comply.
Virginia: The state’s program is set to launch on or before July 1, 2023.
Seattle: The Seattle Retirement Savings Plan is scheduled to begin July 1, 2023.

What are the pros and cons of state mandated retirement plans versus employer sponsored 401(k)s?

While both types of retirement plans can boost employee satisfaction by giving them the opportunity to save for the future, there are unique pros and cons to each approach.

State Mandated

Pros

There’s less liability since you aren’t liable for investment decisions or performance and are not considered a fiduciary
The investment menus are limited and, therefore, may be easier to understand
Most programs don’t charge employers to participate and no employer contributions are required; plus, participant fees are reasonable

Cons

The program picks the investments so you may not have offerings that match the needs of your workforce
A Roth IRA only allows post-tax contributions of up to $6,000 in earnings, or $7,000 for those 50 and over, which can limit employees’ ability to save
There are some administrative and reporting requirements

Employer Sponsored Pros

Pros

You can choose your own investments, giving you more options
A traditional 401(k) allows contributions of pretax earnings up to $20,500 or $27,000 for those 50 and over
You can provide a company match and other plan features like loans
Your company may be able to claim a tax credit of up to $5,000 for three years to start a 401(k) under the SECURE Act

Cons

There are more compliance and administrative requirements employers must meet
You’ll be responsible for start-up costs as well as third-party administrator (TPA) fees to cover the day-to-day management of the plan

How to Decide Between a State Mandated Retirement Plan or 401(k)

If you’re a small business and want to offer a retirement plan but want it to be easy and cost-effective, then a state mandated plan may be the way to go.

For added flexibility for you and maximum savings for your employees, a 401(k) may be a better fit. But the added features and customization also come with greater complexity and cost. Our guide on starting a 401(k) outlines what’s involved to help you decide if you can take on the extra administrative tasks.