By Amie Agamata
As advisors, we’re often speaking with our clients about the importance of saving for retirement. We change clients’ lives through financial planning and helping them understand why putting money aside for their future is critical.
However, many Americans tend to have a difficult time saving a proper amount for retirement. The Federal Reserve reported that nearly 25% of Americans have no retirement savings and about 44% of those still in the workforce believe they’re not on track for retirement.
A main reason why Americans aren’t saving is because roughly 55 million of them don’t have access to a 401(k) plan at work. While there are alternative solutions like Individual Retirement Accounts, most without access to an employer-sponsored retirement plan do not properly prioritize saving for retirement which leads to procrastination and/or no action being taken.
The realization that most Americans aren’t ready for retirement has caused many states across our country to take initiative to help increase retirement plan access and savings by implementing state-run programs.
Twelve states and one city have started taking action into their own hands: California, Colorado, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Seattle, WA, Washington, and Vermont.
California, Colorado, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Seattle, WA have enacted automatic IRAs while the other states’ programs are voluntary.
Here are 5 things you need to know about the rise of state-IRA programs across the U.S.:
1) Employers who currently do not offer a qualified plan to their employees may be required to participate in the state-IRA program. Each state’s requirements and implementation timeline are a little bit different. Illinois was one of the first states to implement their Secure Choice plan and it only affects employers with 25 or more employees who have operated in the state for two years. Some states like California are currently phasing in the state-IRA program based on the number of employees. For example, employers with 50 or more employees will be required to sign up for CalSavers by June 30, 2021, and then employers with five or more employees will be phased in by June 2022. Maryland$aves will affect all employers who have been in business for two years regardless of the number of employees.
2) Employees must opt out if they don’t want to participate. All the state-IRA programs to date are using behavioral finance to drive successful outcomes through the automatic enrollment feature. This means that employees must complete and submit an opt out form if they don’t want to save. Those who don’t do anything will automatically be enrolled. In California, 7.5 million workers will be automatically enrolled at 5% unless they opt out of CalSavers. This is the same inertia used in many 401(k) plans to increase participation rates and savings habits. Some states have also added the automatic re-en rollment and/or automatic escalation feature. For example, OregonSaves default contribution rate is 5% with an automatic annual increase of 1% in January each year until a maximum of 10% is reached.
3) Employees are responsible to monitor their own annual contributions across all IRAs. All the state-IRA programs are subject to the same rules as normal IRAs. That means if an employee is already contributing to an IRA outside of the state-run program then that individual must ensure they don’t contribute more than the maximum amount. This year, the maximum contribution to all IRAs is $6,000 ($7,000 if you’re over the age of 50). Some state-IRAs like California and Illinois are set up as Roth IRAs. Employees not the employer are responsible for determining if they’re eligible to contribute to a Roth IRA or not.
4) Employers may face penalties for noncompliance and/or failure to remit payments. It’s important for employers to understand their state’s requirements and implementation timeline because it may become expensive if they don’t comply. Some states might give warnings while others may not be as forgiving if employers don’t enroll employees by the state’s deadline or fail to remit contributions to the program on time. States may impose penalties for non-compliance generally range from $100 to $750 per eligible employee. It’s important to note that some states that didn’t originally charge fines recently implemented a penalty system. Oregon as an example now caps fines at $5,000 per year per employer.
5) Employers cannot make contributions. Unlike qualified plans, employers won’t be able to help employees save for retirement through the state-IRA programs. Employers that may want to reward employees through retirement savings might consider setting up a qualified plan. Keep in mind if an employer sets up a 401(k) plan in the future, participants cannot rollover Roth IRAs into the Roth 401(k) plans under current regulations.
Amie Agamata is a CERTIFIED FINANCIAL PLANNER™ in San Diego, CA with clients across the U.S. Her team’s business mission is “working together to achieve financial success through understanding, education, and action©.” Amie serves as the NexGen President for the Financial Planning Association (FPA) of San Diego and member of the FPA Retirement Income Planning Advisory Council.
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