Over the past decade there has been a trend among states to create state-sponsored retirement plans. A move is underfoot in many states to mandate participation. 1
- What is a State-Sponsored Retirement Plan?
A state-sponsored retirement plan provides employees with a public option to enroll in a retirement plan. It aims to increase coverage, thereby reducing the coverage gap.
- What is the Coverage Gap?
For most Americans, an employer-sponsored 401(k) plan is their only source of retirement income outside of Social Security.
But many employees of smaller companies lack access to a retirement plan.
The coverage gap is made up of the small company employees who do not benefit from an employer-sponsored 401(k) plan.
- Why do some businesses not offer employees a 401(k) plan?
- Retirement Savings Crisis
The coverage gap has led to a retirement savings crisis, which the COVID-19 pandemic has worsened. 3
- Legislative Developments/Trends
To address both the coverage gap and decrease reliance on government assistance, some states have taken the step of mandating employers provide em-ployees the option to enroll in a retirement plan.
- California Example
The biggest and most prominent example is California’s mandated retirement program, which was signed into legislation by SB-12344 in 2012.
It mandates employers with five or more employees enroll in the state-run retire-ment plan option named CalSavers5 , or a private retirement plan.
- CalSavers Deadlines
California takes a phased approach to mandate employers enroll in CalSavers or a private retirement plan:
- September 30, 2020 – Companies with 100+ employees
- June 2021 – Companies with 50+ employees
- June 2022 – Companies with 5+ employees
- Employer Benefits
Companies in California and other states with these upcoming deadlines will want to begin researching what plan to offer their employees.Companies in California and other states with these upcoming deadlines will want to begin researching what plan to offer their employees.
The good news is that offering a retirement plan to employees – mandated or not; state-run or private – has several benefits for small business owners:
- Demonstrates They Value Employees
- Shows Their Vision
- Allows for Their Participation
But how do you decide between offering a state-run or private retirement plan?
- State-Run or Private Plan?
Whether or not you are in ideological agreement with them, state-run retirement plans grant some benefits to participants. Employees are automatically enrolled in a plan and save for retirement, much like they would in a private retirement plan.
But what do employers and employees sacrifice for this convenience?
As it turns out… a pretty high cost over time!
Private Plan Benefits
The two biggest benefits of a private plan are that it is low cost and easy to ad-minister.
- Low Cost – Employees enrolled in CalSavers pay high fees.
- More Flexibility – Private retirement plans offer more flexibility than state-run retirement plans. This often allows participants to benefit from lower fees and services more tailored to their needs.
- Easy to Administer – State-run retirement plans like CalSavers still require time and effort despite automatic enrollment.
- The Gift of Time – Tracking employee eligibility and keeping accurate pay-roll data, among other duties, are a drain on small business employers’ time.
- Leave it to the Experts – Private plans can offer more enhanced 3(16) ad-ministrative fiduciary services that allow small business owners to focus on growing their core business.
JULY is Advisor-Centric & Participant-Friendly
JULY’s private plan options benefit the advisor and the participant.
Our private, small business 401(k) retirement plan solutions like our upcoming PEP solution and Launch401(k) are low-cost and easy to administer.
Contact your Regional JULY Sales Director to get started on your journey to making small business 401(k)s a key part of your practice.
JULY is a 401(k) services company specializing in hi-touch, tech-enabled re-tirement plan services. Our employees have served as plan experts to advisory firms, advisor and employers in the small and micro 401(k) plan market for over 25 years. Over the last decade, our in-house software development team has built a host of proprietary technology solutions to streamline, automate and sim-plify all facets of retirement planning to make processes rewarding and easy for our clients. For more information about JULY, visit our website https://www.julyservices.com.