Why a state retirement plan may not be a good fit for a small business

Why a state retirement plan may not be a good fit for a small business


There’s been a lot of talk recently about how many American workers lack access to an employer-sponsored retirement plan, and the statistics are alarming. According to a recent study conducted by the Indexed Annuity Leadership Council, one out of every eight American employees are not offered any type of retirement plan from their employer [1]. It gets even worse when the conversation turns small-business-specific. According to the Employee Benefits Research Institute, only about three in ten small businesses have retirement savings plans available to employees [2]. The problem here is obvious, so the government is stepping in.

The long and the short of it is that some states are passing legislation requiring employers to provide an automatic retirement savings vehicle to their employees. Federal and state legislation designed to push 72 million American workers into workplace retirement plans (with an option to opt out) is rapidly emerging, but is a Roth IRA—state-run or not—right for your small business?

Should your small business utilize a state-mandated IRA retirement plan?   

The sweeping generalization that all state-mandated retirement plans are the same is a little dicey. While multiple state governments are stepping in to offer state-run retirement initiatives, each state is defining what triggers employer “qualification” by their own specific terms. For example, the number of employees needed to require access to a state-mandated plan varies from state to state; Illinois requires any business with more than 25 employees to offer a plan, while in California, that number is five.

An even larger challenge state initiatives pose to employers is the fact that they are structuring the required savings plan as Roth IRAs—but many employees, and some business owners or other highly compensated employees, are prohibited from participating in the program due to income restrictions.

That puts employers in a real spot: if they choose the state plan, they may preclude themselves or other employees from participation. But if they choose the state plan for their employees and a different plan for themselves and high-level employees, they could face a “fairness” challenge from employees.

So how can the dilemma be avoided? Business owners should choose the right retirement savings program for all participants—including themselves as participant number one.

Alternatives to state-mandated retirement plans

The newly minted state plans are designed to cover the millions of savers coming into the system in a one-size-fits-all fashion, instead of taking participants’ particular situations into consideration. The “cookie cutter” state plan design is convenient, and may fit the bill in terms of coverage and legal requirement, but ultimately, it may not work to participants’ best interest or provide them with the retirement they envision.

On the other hand, 401(k) plans can be similarly priced to state plans but are actually better for the employees. Generally speaking, they level the playing field in terms of participation—as 401(k) plans include employees at all income levels. Plus, 401(k) plans offer more robust plan design options, allowing business owners to design a plan that best fits their company and employee needs.

If you’re operating a small business in one of the ten states that has already enacted legislation establishing a state-mandated plan, or you live in one of the other twenty-plus states who have begun considering such legislation, it’s time to start weighing your options. But remember, you’re not in this alone.

Let’s start the conversation about how you can navigate increasingly stringent retirement savings program legislation while meeting participant needs in smart and practical ways. Give us a call today at 800.236.7400 to learn more about your options and what the best fit for you might be.


Michael Kiley, Founder and CEO