By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
Business owners have historically viewed employer retirement plans, like 401(k)s, as an effective solution for their own individual retirement savings, a mechanism for attracting and retaining employees or as a business tax saving strategy. Yet despite the potential advantages, a survey indicated that many businesses, particularly small business owners, hesitate to sponsor their own 401(k) programs due to the cost and administrative headaches.* As a result, the Department of Labor estimates that 38 million Americans do not have access to a retirement plan at work.
Now individual states are proactively looking at ways to narrow the retirement savings gap by spearheading efforts to make it easier for small businesses to offer retirement benefits to their employees. Some states have now launched state-run retirement programs with most designed as auto-IRA programs. These state-run plans are often structured as automatic payroll deduction Roth IRAs for employees with no employer contribution requirement, are intended to provide small business owners with a simplistic and cost-effective retirement solution for employees and may be mandatory for select segments of businesses; unless another retirement plan is available. In fact, a few states have already initiated a state-run retirement program, while a slew of other states have enacted legislation for these programs or are considering doing so.
Although the intent of these state-run programs is admirable, impacted business owners will need to weigh the pros and cons of participating in these plans. Certainly, one of the key advantages touted by these state-run programs is simplicity and cost effectiveness for business owners. Conversely, these programs offer very limited participant investment options, no ability for business owners to customize plan features, and no opportunity for employer matching contributions.
Ultimately, whether you’re impacted by a state-run retirement program, or just want to understand your choices in initiating a retirement plan for your business, your Benjamin F. Edwards financial advisor can assist you in understanding your options. Be sure to consult with your tax and/or legal advisor before making any decisions.
*Empower Institute (December 2018)