With the July launch of the pilot phase of OregonSaves, Oregon’s auto-IRA program, a new era in American retirement savings began. While the Oregon effort involves only a handful of employers currently, it is scheduled to take effect for all the state’s businesses in 2020. Illinois, California, Connecticut and Maryland have similar programs in the works scheduled to go into effect over the next few years. Washington and New Jersey are setting up online marketplaces that will feature retirement plans vetted by the state where small-business owners can shop for the plan that best suits their needs.
While there is universal agreement that Americans, particularly the 40% of full-time workers without access to workplace 401(k)s, need help in preparing for retirement, advisors will need to work with their small-business owner clients to help determine whether they and their employees are better off with a state-run plan or one of the other options available in the private sector.
A survey by The Pew Charitable Trusts found that while the majority of small-business owners are in favor of offering retirement plans to their employees, most do not want those plans to be administered by state or federal authorities, preferring a mutual fund company (82%) or an insurance company (72%) instead. However, more than 4 in 10 indicated that they would still support such a program if the state (44%) or federal government (41%) was the sponsor.
The National Association of Insurance and Financial Advisors (NAIFA) thinks that the lack of retirement savings options is not the problem, because “there already exists a strong, vibrant private-sector retirement plan market that offers diverse, affordable options to individuals and employers.” NAIFA believes that factors other than a lack of access to retirement plans are responsible for people failing to save enough and that scarce state resources would be better spent on financial literacy efforts and on outreach designed to educate people on the importance of saving for retirement. NAIFA supports voluntary, private market-oriented programs, such as those planned for Washington and New Jersey.
Among the alternatives to state-run plans are Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs). In these plans, each participant controls their own risk level, asset selection and contribution, and the employer generally has no filing requirements. Participants make payroll deductions into a cudstodied IRA account, a feature that has been shown to make people 15 times more likely to save for retirement.
Unlike a 401(k) or state-sponsored plan, the employer must contribute to the SIMPLE IRA — either dollar-for-dollar matching (up to 3% of the employee’s compensation) or a 2% non-elective contribution for all eligible employees. For participants, the contributions are not subject to income taxes, and grow tax-deferred until withdrawal, and the employer gets a tax deduction for contributions made to employees’ plans. Employers may also claim a tax credit of up to $500 for each of the first three years of the accounts to cover startup and employee education costs. Employees benefit because they have access to a retirement savings account that is automatically deducted from their paycheck, with a wide variety of investment choices.
In an earlier ThinkAdvisor column, I discussed how retirement saving is one part of the longevity crisis our society faces. Segal Consulting conducted an analysis earlier this year and found that if all full-time workers had access to retirement plans, states could save a collective $5 billion on future Medicaid costs — and that’s just in the first decade — by allowing more people to rise out of poverty before retirement.
That is a pretty good reason by itself for advisors to work with their clients who own small businesses to find the right retirement savings plans for their employees. There’s also the strong likelihood that those small-business owners who don’t choose a retirement savings plan for their employees could have one imposed on them by their state.