The retirement plan “crisis”
With the decline of pensions, crazy inflation, and increased rent and housing costs, the “retirement crisis” in America continues. This isn’t news to any of us, and it definitely isn’t to the government. In fact, state and federal governments are trying to combat retirement plan challenges. But…if there’s one thing we can learn from the beloved show Parks and Recreation, it’s that government-run programs can be, well, a mixed bag. This brings us to the topic at hand—mandatory state-sponsored retirement programs and why, like Ron Swanson’s woodworking skills, sponsoring a qualified retirement plan is just better.
The rise of state-sponsored retirement programs
States across the U.S. are increasingly rolling out mandatory retirement programs aimed at workers who don’t have access to employer-sponsored retirement plans. The goal is to ensure that every worker has some form of retirement savings, providing a basic level of financial security for all retirees, so they don’t end up living off waffles and whipped cream à la Leslie Knope. But while these programs offer a safety net, they often come with limitations that can make them less appealing compared to a qualified retirement plan.
State-sponsored retirement programs overview and limitations
More and more state retirement programs are popping up; these are the states that have active mandatory programs in place or plan to in the near future: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Virginia, Vermont.
Each state has different plan details, but many programs have these similarities:
- Employee contributes to a Roth IRA
- Employee contributions are automatic (employee can opt out)
- Investment options are chosen by the state
- Employer contributions are not allowed
While state-sponsored plans get everyone in the door, as you can see above, they’re not always the best seat in the house. Think of them as the “Gary, Jerry, Larry, Terry Gergich” of retirement plans—well-intentioned but maybe… falling short of expectations.
- Limited Investment Options: State plans often come with a limited range of investment choices. You might find yourself stuck in a low-yield, conservative fund, which is a far cry from the diversified options available in private plans.
- Lower Contribution Limits: These programs often have lower contribution limits compared to 401(k) plans, meaning your savings potential is capped.
- Less Flexibility: State programs can be rigid. Want to make changes or take advantage of employer matching? Sorry, no can do.
Why sponsoring a qualified retirement plan is better
Ron Swanson once said, “There’s only one thing I hate more than lying—skim milk. Which is water that’s lying about being milk.” When it comes to retirement savings, state-sponsored plans might just be the skim milk of options. Here’s why a qualified retirement plan is the real deal:
- Flexibility to meet unique goals. Customized plan design allows employers to save more, the potential to avoid stressful compliance testing, and reward key employees. By sponsoring their own plan, employers can choose the best option for them, control investments, and make changes as they see fit.
- Greater tax benefits. Most state programs don’t allow employer contributions, meaning employers miss out on the tax deductions possible by contributing to employees’ retirement funds. Additionally, IRA income limitations prohibit many employers and key employees from contributing at all. A qualified retirement plan allows employers to contribute to both, gaining the tax benefits of both, as well. Leslie Knope would call that a “win-win-win.”
- Employee retention and recruiting. According to a Glassdoor survey, 4 out of 5 employees would prefer new or added benefits over a raise. By providing employer contributions (not allowed in state-sponsored programs), employers can create a valuable incentive for employees and potential new talent.
- More savings. Retirement plan contribution limits set by the IRS allow for significantly more savings potential with qualified retirement plans. These options are only available when established by the employer, not through state-sponsored plan options. Go this route, and you’ll be feeling like you finally scored tickets to the much-coveted Mouse-Rat reunion concert.
So…what now?
In the world of retirement planning, it’s clear that while state-sponsored programs offer a good starting point, they’re no match for the flexibility, benefits, and long-term growth potential of a qualified retirement plan. It’s like comparing the bureaucratic efficiency of the Pawnee Parks Department to the laser-focused efficiency of Ron Swanson’s woodworking shop—no contest.
If you’re an employer considering your options, think big. Think qualified retirement plans. To quote Leslie Knope, “I took your idea and made it better,” and we’d like to think qualified retirement plans are the Leslie Knope to state-sponsored programs.
Some states with established plans have deadlines that have already passed, but have no fear – employers can still take advantage of the perks of sponsoring their own plan! If they’ve registered for the state’s program, they don’t have to stay in it. I hear Rent-A-Swag set up a plan for Tom and Jean-Ralphio as soon as they could to avoid getting stuck in an IRA.
Some states’ programs are starting and require employers to take action soon: either registering for the state’s program or establishing their own plan. To bank on the benefits above, employers should choose the latter option, and we can help!
At EGPS, we specialize in finding the perfect retirement plan solution for our clients. We’re available and ready to guide employers to the best option that fits their organization’s needs.
Fill out the form below to learn more about the retirement plan options available and how EGPS can help.
