Andrew Glaze is the Founder & CEO of Wealth Stack, an emerging fintech company. He is also a CFA, former investment banker & Army veteran.
Retirement funds in America accumulate mainly through employer-sponsored plans including 401(k) accounts. As of 2021, 68% of private industry workers had access to this type of plan. However, while an exact number is not known, in 2017, the U.S. Census Bureau estimated that only 41% of those with access to a 401(k) contributed to it.
As a response to this issue, a number of states have passed retirement mandates requiring businesses to offer their employees a retirement savings plan. While well-intended and necessary, these mandates can have a significant impact on small businesses, which often lack the resources to comply and the options needed to maximize their investment into retirement benefits.
But, just how do these requirements affect business owners themselves? As a leading digital solution for SIMPLE IRAs, Wealth Stack has worked hard to explore the costs and benefits of state retirement mandates for small-business owners as part of improving our own affordable retirement solution offerings. Here is what we’ve found.
Which States Currently Have Retirement Mandates?
At the time of writing this article, more than 30 states have considered or begun to implement state-mandated retirement plan legislation. Of those 30 states, 13 have currently signed those programs into law. This includes programs such as:
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• CalSavers in California.
• Illinois Secure Choice in Illinois.
• MYCTSavings in Connecticut.
• OregonSaves in Oregon.
For California business owners, deadlines are quickly approaching to comply with CalSavers. Any qualifying business owner with more than five employees is required to register their employees for CalSavers or another qualifying retirement plan by June 30th, 2022, or face up to $750 in fines per employee.
The Case For Mandatory Retirement Options
Study after study shows that workers are not only not able to save for their future, but that they’re unsure how to. Just take a look at the statistics:
• The average working household has virtually no retirement savings.
• 75% of low-income workers and half of middle-income workers have no dedicated retirement assets. Furthermore, 74% of Latinos in a 2019 study reported that they had no access to a workplace retirement plan.
• According to one research survey, only 4 in 10 businesses surveyed with less than 100 employees offer retirement benefits.
However, as a business owner, there are numerous benefits of implementing a retirement plan for your employees. Namely, the Retirement Plans Startup Costs Tax Credit allows eligible employers to claim a tax credit of up to $15,000 ($5,000 yearly for three years) for the “ordinary and necessary costs” of starting a SEP, SIMPLE IRA or other qualified plans, such as a 401(k).
At Wealth Stack, we’ve recently added this tax deduction assistance to our SIMPLE IRA packages, and business owners can expect that other similar platforms will begin to offer this as a perk as well.
The Issues And Obstacles Small-Business Owners Face When Offering Retirement Plans
Pew Charitable Trusts surveyed small-business owners and found that they would be more inclined to offer retirement benefits if they thought offering one would help their business achieve greater profitability, if there were financial incentives or if they saw increased demand from employees. As a former Audit chair of NASDAQ:MDIA and a member of the audit committee of NASDAQ:NCMI, I have seen similar answers from others as well.
Are state-mandated plans a solution to those issues? They are certainly designed to help both business owners and their employees. However, the challenges still abound. James O’Donoghue, a retirement plan consultant of BCG Securities, recently cautioned against jumping too quickly to sign up for state-mandated plans.
“They have given no real guidance on what their plan is going to look like, so that should tell you it’s probably not the best option to wait for the state to come out with a plan at the last minute and have the state run your retirement plan for you,” O’Donoghue said. We agree.
How Small-Business Owners Can Prepare For These Changes
If you’re a small-business owner in a state that’s preparing to pass legislation requiring you to offer retirement benefits to your employees, here’s how we suggest you prepare.
1. Understand Your Options
At Wealth Stack, we’ve compared the options across various different states, and more often than not, state-run programs don’t stack up to their private-sector counterparts. Namely, 401(k)s are an outdated, complicated option when compared to a plan like a SIMPLE IRA.
However you decide to comply with the coming mandates, be sure that you’re looking for a retirement plan that not only meets requirements but also allows your employees to learn how to build wealth for themselves in a way that is sustainable.
2. Take Advantage Of Tax Breaks
If you’re going to be required to offer retirement benefits, then you might as well take advantage of the tax breaks that come along with it. Be sure to look into the $15,000 tax credit you can earn through the Retirement Plans Startup Costs Tax Credit. This can help you offset the costs of setting up a SIMPLE IRA or other qualified plans, such as a 401(k).
3. Think About Your Employees
While we understand the struggles small-business owners face when it comes to the cost of setting up these types of programs, there are options out there that fit within a small business budget.
Why do cost-efficient programs matter to a business owner? We found that employees often don’t invest because they simply don’t know how to. Offering them the additional added benefit of financial courses and videos about investing has appeared to increase their interest and satisfaction with their retirement account.
Stay Compliant, But Not With State-Run Programs
Ultimately, investing in your employees’ futures can pay off in the long run. However, the key is to prepare for the coming mandates ahead of time so that you’re able to avoid penalty fees while also ensuring that you’re selecting the retirement plan that best helps your employees prepare for a fruitful future and retirement.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.