Fifty-five million American workers currently lack access to a workplace retirement plan, and a majority of those people work at a small business with fewer than 100 employees. To combat the massive U.S. retirement savings gap, lawmakers in several states are enacting programs designed to enable more workers to save for retirement.
All eyes are on Oregon with this month’s pilot rollout of OregonSaves, America’s first state-run retirement savings plan for private-sector workers. The law will require 64,000 Oregon businesses to offer a new state run auto-IRA or another qualified retirement plan, like a 401(k), to one million uncovered Oregon workers.
Policy aimed at broadening access is a step in the right direction. But before employers sign up for any retirement plan – whether it’s a state auto-IRA or a private market solution – it will be critical to first dig into the details. Here are a few important considerations for small businesses:
Costs: Most retirement plans charge high fees that eat at worker savings over time. Be sure to look for options that offer access to low-cost index funds and do not charge excessive fees for record-keeping, administration, investment management, or other associated services. The fee stack can add up quickly. OregonSaves charges employees 1% of assets per year, which is near the industry average – but can amount to thousands of dollars being lost to fees over one's lifetime. It’s worth the extra research to make sure you are getting your employees, and yourself, the best plan possible.
Employee contributions: All workers should be able to save through an employer-sponsored retirement plan. However, the federal government has set contribution limits that vary greatly. For example, OregonSaves plans are currently set up as Roth IRAs, which have annual contribution limits of $5,500 for investors younger than 50 and $6,500 for those over 50. Any contributions to your personal traditional or Roth IRA would be included in this limit. The IRA contribution limit is significantly lower than other retirement vehicles like a 401(k), which allows contributions up to $19,000-25,000 per year in 2019 (depending on the participant's age). Additionally, there will be workers who do not qualify for Roth IRAs at all: any worker with a modified AGI higher than $133,000 may be ineligible for OregonSaves should their employer decide to enroll.
Employer contributions: Many businesses choose to open retirement plans to offer their employees a great benefit: the ability to secure their futures and, if they are even luckier, enjoy “free money” in the form of an employer match or profit share. It’s a win-win situation – when an employer makes contributions to employees’ retirement accounts, they receive a deduction on their business tax return. Unfortunately, OregonSaves doesn’t allow for employer contributions, so Oregon businesses looking to offer a match or gain the tax advantages associated with employer contributions should consider alternative retirement vehicles to OregonSaves.
The bottom line is our nation’s retirement crisis won’t solve itself. While Guideline’s mission aligns with that of OregonSaves, as well as the other state-run retirement plans in development in California (SecureChoice), Illinois, Connecticut and Maryland: to make retirement a universal benefit, we believe that it’s important to maintain a critical eye to ensure the “benefit” holds up to its name, and for small business owners to make decisions that work best for them and their employees. Today more than ever, the public sector and private markets must work together to serve the tens of millions of Americans who lack access to a secure retirement.