State-mandated retirement plans: 4 things small businesses need to know

In today’s corporate retirement landscape, more and more states are passing laws that require businesses of certain sizes to automatically enroll employees into an IRA or other qualifying retirement plan. If you are a small business owner, this recent wave of state legislation may apply to you.

Different states have different laws and are at different stages of implementation, and it can be a lot to keep track of, to say the least. Let’s walk through some essentials to help you parse through what state requirements may mean for you and how you can discern the best next step for your business.

#1: State-mandated retirement plans are likely the future for small businesses

New state laws are attempting to solve a problem: Few private sector workers in the U.S. save for retirement without an employer-sponsored retirement plan, but only about half have access to one.  And since small to mid-sized businesses employ nearly half of the American workforce, the logic is that small businesses can play a strategic role in adequately preparing more workers for retirement. It makes sense: Americans are 15 times more likely to save for retirement through the workplace.  For small businesses and their employees, retirement plans mean building for the future.

Find out when and how new state laws may apply to your business so you can continue to operate smoothly and avoid penalties: California, Colorado, Connecticut, Illinois, Maryland, Massachusetts, Oregon, Virginia, and Washington already require small businesses to provide auto-enrollment in retirement plans. Next in line are Maine, New Jersey, New Mexico, and Vermont, where laws have passed and are in the process of implementation. Legislation is also on the docket in Delaware, Hawaii, Minnesota, Nevada, New York, and Vermont.

#2: There is a strong business case for offering a retirement plan

Beyond fulfilling state law requirements, a retirement plan can help your business attract talent, control costs, and build for the future: 89% of employees would be more invested in staying at their company if it provided financial benefits that met their needs, and nearly 3 in 5 rank retirement planning assistance as a high priority when choosing where to work. Remember, if employees feel supported, they can focus more fully on contributing to your business’ success. But if employees leave to find greener pastures, replacing them can cost between one-half to two times their annual salary.

Along with boosting employee retention and productivity, retirement plans can also open the door to many cost-saving strategies for small businesses. Some fees and administrative expenses are tax-deductible, and the federal government offers incentives for small business retirement plans, including through the SECURE 2.0 Act. Additionally, your retirement plan providers can help you customize and streamline plan design, setup, and administration. With the right plan and support, your retirement plan can become a competitive advantage.

#3: You can select the right retirement offering for your business

Think of state requirements as an opportunity to tailor benefits solutions that better support your business and employees—and there are many options to choose from.

Most states leverage an automatic Roth IRA to provide small business employees with built-in contribution rates of 3-5%, auto-escalation features, and access to a qualified default investment alternative (QDIA) such as a target date funds, without requiring an employer match. This may work for your business, but there are also other options.

For example, Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRAs allow employees to put pre-tax contributions toward retirement and are relatively simple to set up and administer. And a 401(k) plan allows employees to automatically withdraw funds from their paychecks to invest toward retirement, with tax breaks. A 401(k) plan allows employees to contribute greater amounts than a Roth IRA, and there is no income limit for employees to contribute to a Roth 401(k) plan. A 401(k) can also give your company an edge by allowing you to match employee contributions up to a certain percentage.

Related: Solo 401(k)s, SIMPLE IRAs and SEP IRAs: Choosing the right plan for a small business

Research all your choices and consult legal and tax experts so you can make an informed decision about which solutions best suit your business. You may also want to connect with a Financial Advisor: We’ve found retirement plan sponsors for businesses of all sizes said that one of the top advantages of working with a Financial Advisor is receiving guidance for regulatory concerns. Additionally, 87% of retirement plan sponsors say that working with a Financial Advisor on their workplace retirement plan helps improve participant outcomes.

#4: Seize the opportunity

Workplace retirement solutions have never been more accessible, affordable, or timely. Since retirement savings vehicles are becoming an increasingly popular legislative priority, it’s important for small businesses to take steps now to plan and set up a strategy. You don’t have to navigate state legislation and workplace retirement solutions by yourself: Your legal, tax, and financial professionals can help you weigh all your choices when considering a retirement plan for your small business.

 Anthony Bunnell is Head of Retirement Solutions and Nonqualified Deferred Compensation at Morgan Stanley at Work.